Bounty and subsidies: financial assistance received in commencing a business - whether received 'to commence a business'

Is a grant that is received by a taxpayer as it commences its business, where the decision to commence the business is not dependent upon the receipt of the grant, a bounty or subsidy received in relation to carrying on a business for the purposes of section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and not 'to commence a business'?

Yes, a grant that is received by a taxpayer as it commences its business where the decision to commence the business is not dependent upon the receipt of the grant is received in relation to carrying on the business for the purposes of section 15-10 of the ITAA 1997. It is not received to 'commence a business'.

The taxpayer was created as a special purpose vehicle for the specific purpose of undertaking a project that included the design, procurement, construction and operation of a major asset.

The responsibility for delivering the project was previously undertaken by another entity. Soon after its incorporation, the taxpayer assumed responsibility for delivering the project and commenced activities that are directed towards the design, procurement and construction of the relevant asset. The project involved a number of stages of construction and some of these stages had already been completed by the taxpayer's predecessor.

The taxpayer received a government grant to partly fund completion of the final stage of construction. The decision to incorporate for the purpose of undertaking the project and the assumption of responsibility for delivering the project were not dependent upon the receipt of the grant.

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.

The terms 'bounty or subsidy' includes a grant (see Taxation Ruling TR 2006/3 'Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business': paragraph 96, citing Mahoney J in Reckitt & Colman Pty Ltd v. FCT (1974) 4 ATR 501; 74 ATC 4185).

A bounty or subsidy will be 'in relation to' carrying on a business when there is a real connection between the receipt and the carrying on of the business. The term 'in relation to' includes within its scope receipts that have a direct or indirect connection to the business. As stated by Hill J in First Provincial Building Society Ltd v. Commissioner of Taxation (1995) 56 FCR 320; [1995] FCA 1101; 95 ATC 4145; (1995) 30 ATR 207 ( First Provincial ), The words ''in relation to'' are words of wide import. They are capable of referring to any relationship between two subject matters, in the present case the receipt of the bounty or subsidy, on the one hand, and the carrying on of the business, on the other: cf O'Grady v The Northern Queensland Company Limited ( 1989-1990 ) 169 CLR 356 at 364-365 per Brennan J and at 376 per McHugh J. As McHugh J (at 376) points out, the degree of connection will be "a matter of judgment on the facts of each case''. If the relationship was a merely remote one, [the provision] would have no operation. What is necessary, at the least, in the present context is that there be a real connection. But the existence of the alternative first limb of the paragraph makes it clear that the relationship need not be direct, it may also be indirect. (emphasis added)

In O'Grady v. Northern Queensland Company Limited (1990) 169 CLR 356 (O'Grady), McHugh J also said at CLR 376: the prepositional phrase "in relation to" is indefinite. But, subject to any contrary indication derived from its context or drafting history, it requires no more than a relationship, whether direct or indirect, between two subject matters (emphasis added)

The comments by Hill J in First Provincial and McHugh J in O'Grady make it clear that all that is required for a bounty or subsidy to be received in relation to carrying on a business is that there is 'a relationship' to the carrying on of a business that is not so remote as to be insignificant. It is also clear from the use of the expression 'any relationship' by Hill J and the conclusion that the relationship may be indirect that there is no requirement that the relationship be the dominant or main relationship. The degree of the connection will be a matter of judgement on the facts of each case (see O'Grady (1989-90) 169 CLR 356 at 376).

A bounty or subsidy must be related to the 'carrying on' of the business and not merely for commencing or ceasing a business. As stated by Hill J in First Provincial : the relationship must be to the ''carrying on'' of the business. These words may perhaps be understood in opposition to a relationship with the actual business itself. They would make it clear, for example, that a bounty received, merely in relation to the commencement of a business or the cessation of the business, would not be caught. The expression "carrying on of the business'' looks, in my opinion, to the activities of that business which are directed towards the gaining or producing of assessable income, rather than merely to the business itself.

A bounty or subsidy to commence or cease a business is not included in assessable income as a bounty or subsidy in relation to carrying on a business under section 15-10 of the ITAA 1997 (see paragraph 26 of TR 2006/3).

The commencement of a business is a specific point in time. In Goodman Fielder Wattie Ltd v. Federal Commissioner of Taxation (1991) 29 FCR 376; 91 ATC 4438; (1991) 22 ATR 26 ( Goodman ), Hill J said that the actual date of commencement of a business is a question of fact. In Whitfords Beach Pty Ltd v. Commissioner of Taxation (1983) 14 ATR 247; 83 ATC 4277 ( Whitfords Beach ), Bowen CJ, Morling and Fitzgerald JJ said 'in order to determine when the taxpayer's relevant business commenced, it is necessary to have regard to both the taxpayer's purposes and to its activities'. A mere intention to commence a business is not enough: see Hill J in Goodman . There must also be activity.

However, the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the relevant business is being conducted. Little activity may suffice for carrying on a business which does not call for much activity: see Inglis v. Commissioner of Taxation (1980) 10 ATR 493; 80 ATC 4001.

The requisite degree of activity will be established where the taxpayer's activities show that the taxpayer is committed to proceed with the implementation of its purpose to carry on a business.

The decision in Whitfords Beach illustrates this point. The Full Federal Court said that although the relevant project: was to extend over a number of years and was to involve development in stages, there was from 20 December 1967 both a persistent intention to develop, subdivide and sell all of the deferred urban and rural land and a continuous course of conduct directed to the implementation of that intention.

Accordingly, the Full Federal Court concluded that the taxpayer's business of developing, subdividing and selling the land commenced as soon as the intention to take steps for that purpose in relation to the entire land was formed and activities directed to that end were commenced.

A bounty or subsidy is received to 'commence a business' if the bounty or subsidy is to enable the recipient to reach the necessary point where the recipient is committed (and such commitment is demonstrated in its activities) to proceed with the implementation of its purpose to carry on a business. However, a bounty or subsidy that is received in relation to activities of an entity as it commences its business is not received to commence the business if the decision to commence is not dependent upon the receipt of the bounty or subsidy. If there is a real connection, whether direct or indirect, between the bounty or subsidy and the carrying on of a business, it would be received in relation to carrying on a business.

Thus, a grant that is received in relation to an activity that is integral to carrying on a business (such as the acquisition of an asset that is necessary for the business) is received in relation to carrying on a business even though the activity may be carried out soon after the business commences and is preparatory to and not directly productive of assessable income.

In the present case, the grant was not to assist the taxpayer to reach the necessary point where it could be said that the taxpayer was committed (and such commitment was demonstrated in its activities) to proceed with the implementation of its purpose to carry on a business. The taxpayer was incorporated for the specific purpose of undertaking a project that included the design, procurement, construction and operation of an infrastructure asset and assumed responsibility for delivering the project through its activities soon after its incorporation. It is considered that the taxpayer commenced carrying on the business of delivering the project from that point in time. While the receipt of the grant was important and assisted the taxpayer to carry on its business, the commencement of its business was not dependent upon the receipt of the grant. Accordingly, the receipt of the grant is not received to commence a business .

The taxpayer's activities in completing the final stage of the construction process asset are activities that are integral to the taxpayer's business even though they are preparatory to, and not directly productive of assessable income. Accordingly, the receipt of a grant to partly fund those activities is received in relation to carrying on this business.