As a result of the ongoing impact of COVID-19, the State and Territory governments have announced various programs aimed at supporting individuals and businesses. The Federal Government has made many of these grants non-assessable non-exempt (“NANE”) income. Beneficiaries of these programs should ensure they have considered the tax treatment of the amounts received, including the deductibility of expenses associated with obtaining advice and assistance in relation to grant applications.
Enacted in 20201, section 59-97 of the Income Tax Assessment 1997 (“ITAA 1997”) provides that certain State and Territory COVID-19 grants to eligible business entities may be treated as non-assessable non-exempt (“NANE”) income.
What grants have been made exempt?
A grant qualifies for NANE treatment if the following conditions are satisfied:
- The recipient carries on a business and has an aggregated turnover of less than $50 million.
- The payment is made under a State or Territory grant program announced on or after 13 September 2020.
- The Treasurer declares the grant program to be eligible for NANE treatment.
Since its enactment, the Treasurer has exercised the power provided by section 59-97 on three occasions2 in response to changes to, and extensions of, COVID-19 support programs. Businesses will need to continue to monitor developments in this respect as further exercise of the power is likely considering that the only programs declared to be eligible are those administered by New South Wales and Victoria.
To assist taxpayers, the ATO maintains an up-to-date list of payments that have been declared to be NANE (see here).
One important point to note is that section 59-97 only applies in relation to amounts received in the 2020-21 and 2021-22 income years: State and Territory grants received in the 2019-20 are not eligible for NANE treatment. While there is no intention to declare amounts received in the 2019-20 year as eligible, the possibility of an extension to cover amounts received after 30 June 2022 cannot be ruled out at this stage.
Can I claim deductions?
Businesses may have incurred expenses in determining their eligibility to participate in the various programs and preparing their application for assistance. The deductibility of those expenses requires a consideration of two sections in the ITAA 1997: the general deduction section (section 8-1) and a specific section dealing with tax-related expenses (section 25-5). Section 8-1 specifically denies a deduction for an expense to the extent that it relates to gaining income that is NANE. Section 25-5 contains no similar limitation.
As might be expected, the scope of section 25-5 is narrow; in particular, it is limited to expenses relating to managing one’s income tax affairs. As such, it would cover matters relating to PAYG withholding, PAYG instalments and Medicare levy but would not extend to matters relating to FBT, GST or State taxes. Expenses related to determining entitlement to and applying for a State or Territory grant would not be deductible under section 25-5 as the expenses have no relationship to the income tax affairs of the recipient.
Can you provide examples?
The following examples are drawn from the ATO website.
Example 1 – Expenses incurred solely to get a non-taxable government grant
Flame Pty Ltd engages a bookkeeper to apply for a non-taxable government grant on their behalf.
The bookkeeper provides no other service to Flame Pty Ltd and gives them an invoice for a fee solely for applying for the grant on their behalf.
Flame Pty Ltd cannot claim a tax deduction for this fee.
Example 2 – Expenses incurred to gain assessable income and to get a non-taxable government grant
Flame Pty Ltd is eligible to receive a government grant that is non-taxable.
Flame Pty Ltd asks their accountant to apply for this grant on their behalf. Their accountant does not separately bill Flame Pty Ltd for this service, but itemises the fee charged for applying for the grant in a quarterly bill that they give to Flame Pty Ltd for professional services provided over the quarter.
Flame Pty Ltd cannot claim a deduction for this part of the bill.
Example 3 – Expenses incidentally related to getting a non-taxable government grant
Flame Pty Ltd is eligible for a non-taxable government grant if they keep their staff on the payroll.
Flame Pty Ltd uses the grant to pay for wages, rent and utilities that they would ordinarily incur in carrying on his business.
Flame Pty Ltd can claim a deduction for the wages, rent and utilities paid.
What are the next steps?
Clients should contact their Pitcher Partners representative to review their existing arrangements and determine what action is required in light of the changes.