The ATO has recently reminded businesses that payments received for delivering services under participating Commonwealth programs will generally be assessable income, regardless of the fact that the funding originates from a government source.
The ATO's message appears aimed at addressing a common misunderstanding among service providers who may incorrectly assume that government-funded payments are exempt from income tax simply because they are connected with a government initiative.
The ATO specifically notes that the issue can affect businesses providing services through Commonwealth-funded programs, including:
disability support services;
aged care services;
childcare services;
hearing services;
NDIS-related services; and
veteran health services.
While these sectors are specifically mentioned by the ATO, the underlying principle is broader. Where a business is being paid to provide services, the source of the funding does not generally change the character of the income.
For many businesses, the important point is that payments received for delivering services under a government program are generally treated in the same way as other business income. The fact that the funds may have originated from a government program does not automatically make them exempt income. As a result, businesses should generally include the payments in their assessable income and ensure they are reported correctly in their tax returns.
The ATO highlights three areas that businesses should keep in mind:
maintain accurate records of payments received and the services provided;
These reminders may be particularly useful for smaller service providers that receive funding from multiple sources and may not always separate government-funded income from other business receipts.
The ATO receives detailed information through its data-matching arrangements about payments made under government programs, and this area is clearly on its radar. This means mismatches between information reported to the ATO and income reported in a tax return may be more readily identified. Where income is omitted, businesses may face amended assessments, interest charges and, potentially, penalties.
This topic provides a good opportunity to remind clients that the tax treatment of a payment depends on its nature, not simply where the money came from. Clients who receive payments connected with government-funded programs may benefit from a review of how those amounts are being recorded and reported, particularly if they have assumed that government-sourced funding receives special tax treatment.