Of little surprise, post the recent announcement that the UOMI rate was increasing to 10.91% effective 29th August 2023, the Fringe Benefit Tax (FBT) prescribed rate of interest on low-interest loans is also heading in the same direction, increasing from the present 7.89% to 8.41%, effective from the quarter commencing 1st October 2023.
Grants & subsidies income tax/GST IS issued
Inland Revenue (IR) has recently issued two separate interpretation statements (IS) on the topic of grants and subsidies – one focussed on the income tax issues surrounding the receipt of such payments, while the other considers the GST issues – in particular, the potential application of section 5(6D) of the GST Act 1985.
IS 23/06 is dedicated to income tax, specifically the potential application of sections CX 47 and DF 1 (the grant provisions) of the Income Tax Act 2007. Where these provisions apply, a grant or subsidy paid by a local authority, public authority, or public purpose Crown-controlled company, to a business, is not taxable, and the expense funded by the grant is non-deductible. Effectively, therefore, the grant provisions are intended to make grants tax neutral to a business.
The IS notes that a payment in the nature of a grant or subsidy has one or more of the following characteristics:
- it is paid gratuitously (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 public, charitable, or private bodies to confer benefits on third parties; and,
- it is made to promote or encourage an industry or enterprise.
While in many cases, it will be clear whether or not the grant provisions apply to the payment, the core purpose of IS 23/06 is to provide guidance on the following areas, where application of the provisions may be a little cloudier:
- the payment is not for any specific expenditure;
- the payment is not spent in the same year in which it is derived; or,
- there are surplus funds.
The detailed commentary commences with a discussion of each of the four required components that would exist, in order for the grant provisions to have application. Also clarified here is that loans under the Small Business Cashflow Scheme, loans under the R&D Loan Scheme, R&D tax loss credits and R&D tax incentive transition support payments are specifically excluded from application of the grant provisions.
With respect to the first item, IR’s view is that the nexus requirement between the payment received, and the expense incurred should be interpreted widely. While, therefore, the payment may not be directed towards the specific deductible expenditure, it will still be governed by the grant provisions where the amount is spent on more general deductible expenditure.
In relation to the second item, IR’s view is that there is no requirement in the law that the payment is spent on deductible expenditure in the same year that it is derived. However, there is an expectation that the relevant expenditure will be incurred within a reasonable timeframe. A couple of things should be noted here. Usual principles of derivation apply, so the date a payment is received does not necessarily correspond to the date of derivation, particularly where there may be specific conditions that may be attached to the grant, which, if not satisfied, may dictate that the grant needs to be repaid. Also, sometimes the grant payment will reimburse expenditures already incurred in a prior income year. If this is the case, then a reassessment of prior year tax returns may be required to ensure that the principle of tax neutrality associated with the grant provisions is maintained.
Finally, in respect to the third item, if there are surplus funds remaining once specific expenditure the grant was targeted towards has been incurred, IR’s view is that the grant provisions will also govern general deductible expenditure funded by the surplus funds. So, the surplus amount will not be considered taxable, but equally the deductible expenditure funded will no longer be deductible.
And in case you were wondering, if the grant is used to fund depreciable property, you simply reduce the cost base of the depreciable property by the amount funded by the grant, and then calculate your depreciation on the reduced cost base.
The IS is 35 pages in length, with numerous examples throughout to illustrate the main points of the commentary.
IS 23/05 is then dedicated to the GST aspects of the receipt of payments which are in the nature of a grant or subsidy. The specific legislative provision is section 5(6D), which is a deeming provision that applies in certain circumstances where a payment in the nature of a grant or subsidy is made. Section 5(6D) only applies to payments made on behalf of the Crown or by any public authority, and covers payments made to any person in relation to or in respect of that person’s taxable activity, or, to any person for the benefit of and on behalf of another person in relation to or in respect of that other person’s taxable activity. If section 5(6D) is deemed to apply, then the payment will be considered for a supply of goods and services by the person to whom or for whose benefit the payment is made, in the course or furtherance of that person’s taxable activity. If they are a GST-registered person, they will have to account for output tax.
The detailed commentary in IS 23/05 focuses on the three highlighted phrases in the previous paragraph, discussing each requirement in turn. It is a 25-page document, and page 15 contains a useful flowchart you can work through to ascertain whether or not section 5(6D) potentially applies to your scenario. Following that, the remainder of the IS contains numerous examples to illustrate the main points included in the commentary