S CX 47 and DF 1 are the grant provisions which apply to payments in the nature of a grant or subsidy from a local or public authority or public purpose crown controlled(PPCCC) entity to a business.
These provisions are intended to make tax grants neutral to a business. Specifically, CX 47 treats payments as non-taxable and S DF 1 treats expenses funded by such payments as non-deductible.
This means expenses that are funded by the grant will not be deductible. For depreciable property, the cost base of asset acquired, constructed, installed or extended by grant funds is reduced by the amount of the payment. Depreciation will then be calculated based on the reduced cost.
When is a payment a grant/subsidy?
A payment that is in the nature of a grant or subsidy has one or more of the following characteristics:
- It is paid without obligation out of public funds by the crown or another public body
- It is paid to further objectives in the public interest
- It is often made to the public, charitable or private bodies to confer benefits on 3rd parties
- It is made to promote or encourage an industry or enterprise
When do the provisions apply?
In most cases it will be clear when the grant provisions will and will not apply. e.g. when the payment is in the nature of a grant, paid by a local or public authority or PPCCC, paid to a business for business use the provisions will apply. When it is made to a person who is not carrying on a business, not for business use, not in the nature of a grant/subsidy or is a loan under the Small Business Cashflow Scheme the grant provisions will not apply.
When the payment is not for any specific expenditure, is not spent in the same year in which it was derived or there are surplus funds it can be unclear how the provisions will apply. In these more difficult situations, the commissioner will need to take the following things into account:
- The payment and the expenditure it funds must correspond to each other. This means the payment must be intended to be spent on deductible expenses or depreciable property. For example, when business receives a payment for:
- a specific expense, as long as the payment funds the specific expense and that expense is usually deductible to the business, the payment will correspond to the expense
- a capital asset, as long as the payment funds the asset and the asset is depreciable property, the payment will correspond to that asset; and
- general operational expenses, as long as the payment funds the types of expenses that are usually deductible to the business, the payment will still correspond to the expense
- The terms and conditions of a payment or the fund from which a payment is made.
- Deductions corresponding with the payment are denied to the extent that they are funded by the payment. The cost of depreciable property is reduced by the extent of the payment. Expenditure exceeding the payment will still be deductible.
Overall, most grant payments would be caught under the provisions and be non-taxable and non-deductible, in other words the grant payment is tax neutral. If a payment has been made to reimburse expenditure incurred in a previous year, the business may need to amend previous assessments to reverse any previously claimed deductions.
The Commissioner expects businesses to spend payments in accordance with their terms and within reasonable time. Businesses must keep records to demonstrate the payment has been spent in their business and corresponding deductions, to the amount of the payment, have not been claimed.
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