If you’re running a business and have received a grant, subsidy, or incentive, you may be wondering ,is it taxable? The short answer: most business-related grants, subsidies, and incentives are taxable in Australia, but there are exceptions. Knowing how they are taxed is crucial to avoid surprises when lodging your tax return.
In this article, we’ll break down the different types of grants, subsidies, and incentives commonly received by Australian businesses, explain their tax treatment in plain English, and guide you on how to report them correctly. Whether you’ve received a cash boost, an export grant, or a COVID-19 support payment, we’ll help you get your head around what it means for your tax.
What Are Business Grants, Subsidies, and Incentives?
Understanding the Terms
- Grants are funds provided by government bodies or other organisations to support business activities such as innovation, growth, or recovery.
- Subsidies reduce the cost of a good, service, or activity, often paid directly to businesses to reduce expenses.
- Incentives are benefits provided to encourage certain behaviours, such as hiring apprentices or expanding to regional areas.
While these terms are often used interchangeably, they can affect your tax position differently depending on how they are structured and what they are intended for.
General Tax Treatment of Business Grants and Subsidies
Are Business Grants Taxable Income?
In most cases, business grants and subsidies are included in your assessable income. This means they are treated just like your ordinary business income and taxed at your marginal or company tax rate.
Why Are They Taxed?
The Australian Taxation Office (ATO) generally views these payments as business income because they support your trading activities or compensate you for losses.
Example:
If you receive a $20,000 small business recovery grant, that $20,000 is added to your total business income and is subject to tax.
Exceptions: When Business Grants May Not Be Taxable
Not all grants are taxable. The non-assessable, non-exempt (NANE) income category provides some relief.
COVID-19 Related Grants
Several state and federal government COVID-19 support payments were specifically declared non-taxable. To qualify as NANE, these payments must be:
- Declared as NANE by government legislation.
- Paid in response to COVID-19.
- For small to medium businesses (annual turnover less than $50 million).
Example:
The Victorian Business Support Fund grant payments received during 2020-21 were legislated as non-assessable, non-exempt income and were not included in taxable income.
Capital Grants
Grants for capital purposes, such as acquiring or improving assets, may still be taxable, but instead of being treated as business income, they may reduce the cost base of the asset, affecting future capital gains tax (CGT) calculations.
Common Business Grants and Their Tax Treatment
Cash Flow Boost
- Tax Treatment: Non-taxable
- Details: Automatically credited to eligible employers during COVID-19.
- Tip: Still need to report it when lodging but marked as non-assessable.
JobKeeper Payments
- Tax Treatment: Taxable
- Details: Treated as assessable income.
- Tip: Include in your business income section on your tax return.
Research & Development (R&D) Tax Incentive
- Tax Treatment: Offsets, not income
- Details: Provides a tax offset (either refundable or non-refundable) rather than a grant. Reduces the tax you pay rather than increasing your income.
- Tip: Reported via your company tax return rather than as ordinary income.
Export Market Development Grant (EMDG)
- Tax Treatment: Taxable
- Details: Assists businesses with expenses related to export promotion.
- Tip: Treated as business income and included in your assessable income.
GST and Business Grants: Do You Need to Account for GST?
GST treatment of grants is a common point of confusion.
GST Generally Does Not Apply to Grants
Most grants and subsidies are not subject to GST unless you are providing something in return, such as specific services to the grantor.
Example:
Receiving a government grant without providing anything in return = no GST.
Getting paid under a government contract to provide services = GST applies.
If GST is applicable, you will need to report it and remit it as part of your Business Activity Statement (BAS).
Record Keeping and Reporting
To stay on top of your tax obligations, you should:
- Keep clear records of all grants, subsidies, and incentives received.
- Check if each payment is taxable or non-taxable.
- Report all payments correctly in your income tax return.
- Consult your tax agent to ensure correct treatment, especially if you’re unsure.
Common Pitfalls to Avoid
- Assuming all grants are non-taxable ,many are fully assessable.
- Forgetting to include grants in your tax return ,leading to amended assessments or penalties.
- Misapplying GST ,remember, not all grants have GST implications.
Final Thoughts: Don’t Let Grants Create Tax Surprises
Australian businesses benefit from a wide range of grants, subsidies, and incentives ,but most of them are taxable unless explicitly exempted. By understanding the general rules, identifying exceptions, and keeping good records, you can avoid unexpected tax bills.
When in doubt, work with your accountant to clarify how specific grants apply to your situation.
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