HOTLINE QUESTION - Are State/Territory COVID-19 business grants tax-free?

August 2022

Question:

My client is a small business entity and has received a business grant payment from the State government in the 2022 financial year in response to the impact of the State government directives relating to COVID-19 on the business.

Is this grant assessable?

Answer

Generally, a government payment to assist an entity to continue its existing business will be either:

-       ordinary income assessable under S.6-5 of the Income Tax Assessment Act 1997 (‘ITAA97’); or

-       a bounty or subsidy received in relation to carrying on a business and assessable under S.15-10 of the ITAA97.

Refer to Taxation Ruling TR 2006/3.

However, specific legislation may make such payment tax-free by making such payments exempt income, or not assessable and not exempt (NANE) income.

Certain State/Territory COVID-19 business grants received by small and medium sized business entities (i.e., business entities with aggregated turnover not exceeding $50 million) in the 2021 and 2022 financial year may be NANE (i.e., tax-free) under S.59-97 of the ITAA97. 

In order for such payment to be NANE, it needs to be paid under a grant program administered by a State or Territory, or an authority of a State or Territory, and the program need to be declared be legislative instrument as an ‘eligible program’.

State/Territory/authority administering the grant program can only apply for the grant program to be an ‘eligible program’ if:

• the program was first publicly announced on or after 13 September 2020,
• it is, in effect, responding to the economic impact of COVID-19,
• it is directed at supporting businesses that are subject to public health directive applying to a geographical area in which the business operated and whose operations have been significantly disrupted as a result of the directive. 

Eligible programs are declared under the Income Tax Assessment (Eligible State and Territory COVID-19 Economic Recovery Grant Programs) Declaration 2020.  As at the date of 30 June 2022, the most updated compilation is Compilation No. 3, compilation date 5 April 2022 which includes amendments up to Income Tax Assessment (Eligible State and Territory COVID-19 Economic Recovery Grant Programs) Amendment Declaration (No. 3) 2022.  This instrument can be found in the following link - https://www.legislation.gov.au/Details/F2022C00381

It is important to note that the legislative instrument may be amended to add new ‘eligible programs’ and therefore it is important to check back from time to time for any new ‘eligible programs’ declared, and that the compilation version referred to is still in force and the latest.   

Note that the ATO also periodically updates its Eligible COVID-19 business grants and support programs (QC 66889) factsheet to list any new ‘eligible programs’ added. 

Importantly, if a payment made under a grant whereby it is not listed as an ‘eligible grant’, generally speaking, such payment will likely be assessable in accordance to the principles established in TR 2006/3 (refer above).