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My Business Received a Grant from the State Government. Do I Pay Tax on It?
Short answer: Probably. But let’s dive deeper into the tax implications of receiving a contribution and what you need to know about income tax, GST, and turnover calculations to ensure compliance with tax laws.
Income Tax
Most contributions are considered taxable unless they are explicitly excluded from tax under specific provisions of the law.
- Grants Related to Continuing Business Activities
If the grant is provided to support your ongoing business operations, it is typically included in your assessable income for income tax purposes. For instance, if your business receives funding to upgrade equipment, expand services, or cover operational expenses, the contribution amount will generally be taxable. - Grants for Starting or Ceasing a Business
The tax treatment may differ when a contribution is designed to help a business either start up or wind down its operations. In these cases, the payment may not always be taxable. For example, a grant provided to cease operations might not form part of assessable income, but professional advice should be sought to confirm this. - Special Circumstances
Some grants come with conditions that might affect their tax treatment. For example, if the government provides a contribution for disaster recovery or environmental protection, it may be treated differently, depending on the legislation under which it is granted.
Goods and Services Tax (GST)
When it comes to GST, the tax treatment of government grants depends on whether the contribution involves a supply of goods or services.
- Grants Generally Exempt from GST
Most government grants are not subject to GST because they are not tied to the supply of goods or services. For instance, if your business receives a cash contribution with no obligation to provide goods or services in return, the grant is not considered a taxable supply and GST does not apply. - Grants Tied to Specific Obligations
If your business enters into an agreement to provide goods, services, or undertake certain actions in return for the grant, this could trigger a GST liability. For example, if the contribution requires your business to provide a community service or produce a report, GST might be payable because a supply is being made. - Cashflow Boost and JobKeeper
The Australian Taxation Office (ATO) has clarified that certain government support payments, such as the cashflow boost and JobKeeper, are not subject to GST. This is because they are considered payments that are not in exchange for any supply.
JobKeeper Turnover Calculations
The treatment of grants in the context of JobKeeper turnover calculations depends on whether GST applies to the contribution.
- GST-Exempt Grants
If GST does not apply to the contribution, the amount should not be included in your turnover calculations for the decline in turnover test or in the monthly GST turnover figures reported to the ATO by JobKeeper participants. - University Sector Exception
An exception exists for the university sector. In this case, core Commonwealth Government financial assistance is included in the JobKeeper turnover tests, regardless of whether GST applies. This unique treatment is based on specific legislative provisions for universities.
Other Considerations
- Documentation
It is crucial to maintain detailed records of the contribution, including the purpose, conditions, and how the funds are used. This documentation will be critical if the ATO reviews your tax treatment of the contribution. - Seek Professional Advice
The tax implications of contributions can be complex, particularly when they involve large sums or specific conditions. Consulting with a tax professional or accountant can help you navigate these complexities and ensure compliance. - Impact on Financial Reporting
Remember that contributions can also affect your financial statements. For example, taxable contributions will increase your business income, potentially impacting your tax liabilities and financial ratios.
Government grants can provide a significant boost to businesses, but they come with important tax implications that must be carefully considered. Understanding whether your contribution is subject to income tax, GST, or included in turnover calculations for JobKeeper or other programs is essential to avoid surprises during tax time.
If you’ve received a grant, take the time to understand your obligations or consult with a professional to ensure you’re handling it correctly. Whether taxable or GST-exempt, managing contributions properly is a key part of running a compliant and successful business.
For a list of current grants see our resources page or see the West Australian Government’s website.
