Income tax Dates
Find out your tax responsibilities if you receive government and non-government grants and subsidies.
In summary
| Grant from | Purpose of grant | Taxable? | Deductions allowed? | Liable to GST? |
|---|---|---|---|---|
| Central government | To replace lost income or to supplement income | Yes | Yes – if the grant is used to pay expenses your business can still claim a deduction | Yes – if business is GST registered and grant is for use in taxable activity. |
| For deductible expenditure or depreciable property | No | No – deductible expenditure is limited up to the amount of the grant. Depreciation must be based on the cost of the asset less the value of the grant. | ||
| Local government | To replace lost income or to supplement income | Yes | Yes – if the grant is used to pay expenses your business can still claim a deduction | Not generally liable to GST. |
| For deductible expenditure or depreciable property | No | No – deductible expenditure is limited up to the amount of the grant. Depreciation must be based on the cost of the asset less the value of the grant. | ||
| An organisation that is not part of local or central government | To replace lost income or to supplement income | Yes | Yes | Not generally liable to GST |
| For deductible expenditure | Yes | Yes | ||
| For depreciable property | Generally no | A depreciation loss may be available (subject to the capital contribution rules). |
Types of grants and subsidies
Government grants and subsidies are voluntary payments made out of public funds by local and central government. They are made to further objectives in the public interest, such as to support a particular industry, cause or purpose, or in response to an event such as a natural disaster.
There are specific tax rules that apply to government grants and subsidies made to businesses. We call these the ‘grant provisions’.
Your business may receive other types of payments from the government that are not government grants. These might be donations, loans, various research and development payments or payments for services that you have provided. The grant provisions do not apply to these payments. Instead, your business will need to apply ordinary tax rules to decide if these payments are taxable or not. For example, if your business gets a payment for providing a service, this would usually be taxable.
The grant provisions only apply to grants and subsidies received by businesses. If you are in business and you receive a government grant or subsidy for your business, the grant may be taxable or non-taxable depending on what the grant was given for.
Grants or subsidies to replace lost income or to supplement income
If your business receives a government grant or subsidy to replace business income that your business has lost or will lose, or to assist with cashflow, the payment will generally be taxable. The grant should be included as income in your business tax return.
If you use the grant to pay any expenses, your business can still claim a deduction for those expenses.
Grants or subsidies for deductible expenditure or depreciable property
If your business received a government grant to fund either deductible expenditure or depreciable property, the grant will be non-taxable and you do not need to include it in your business tax return. However, you cannot claim a deduction for the expense funded by the grant. If the funding you received was less than what you spent, the part of the cost that is not funded by the grant is still deductible. Where surplus funds are spent on deductible expenditure, then deductions are denied to the extent of the grant payment.
GST
Grants from central government are usually liable for GST.
Grants are liable for GST and should be included in your GST return if all of the following apply:
- you receive a grant or subsidy from central government (for example, from a government department)
- you are, or are liable to be, GST registered
- the grant or subsidy is for use in your taxable activity.
Sometimes central government may make grants to businesses through a delivery partner agency (who makes the payments on their behalf). In these cases, you need to consider whether, for GST purposes, the grant is actually from central government or the partner agency. If the grant is not from central government, see the next section for how to treat these payments.
A $5,000 grant made by the government towards your business’s general operating expenditure will be non-taxable. You cannot claim a deduction for $5,000 worth of operating expenses.
A $4,000 grant made by the government towards the purchase of an item of depreciable property will be non-taxable and the value of the item for depreciation purposes will be reduced by $4,000.
A $30,000 grant made by the government towards employing staff, where any surplus may be used for general operating expenditure will be non-taxable. You cannot claim a deduction for $30,000 worth of expenditure which may be a combination of staff costs or other deductible expenditure.
Your business may receive a grant or subsidy from an organisation that is not part of local or central government, for example, a charity, bank or industry group. Your business may also receive other payments that are not in the nature of a grant or subsidy such as relief payments from mayoral relief funds.
Non-government grants and other payments are subject to ordinary tax rules. This means that non-government grants or other payments that are for operational expenses or to replace lost income are usually taxable and your business can generally claim a deduction for the expenses incurred. These include payments to:
- cover a shortfall in profits or to replace lost income
- assist with cashflow
- meet a specific operating expense such as to replace trading stock
- cover other deductible expenses such as repairs and maintenance work to business assets.
Non-government grants for capital expenses are, generally not taxable. If the grant is for depreciable property, a depreciation loss may be available. However, the capital contribution rules may apply:
Where the capital contribution rules apply, generally, your business can claim depreciation on the cost of the asset reduced by the amount of the grant. Non-government grants for capital expenses include payments to:
- buy, add to or reinstate a capital asset that is part of a business
- assist with starting or winding up a business or part of a business.
GST
Unlike government grants from central government, grants from local government or non-government organisations are not generally liable to GST. Generally, even if you are GST registered, you do not need to include such grants in your GST return. However, if the payment is for goods or services you have provided, then it will be liable to GST if you are, or are liable to be, GST-registered.
In early 2023, the government provided grants to businesses and other organisations following Cyclone Gabrielle. Specific information on these grants can be found here:
If you are given a specified suspensory loan and you do not have to pay it back, the amount left unpaid is counted as gross income.
You'll need to split what is left unpaid into 3 equal amounts and add them as gross income across 3 years. 1 for the year repayment is no longer needed, and the others for each of the 2 years after that.
When you get a wage subsidy, for example Work and Income’s Flexi-wage, you'll need to be registered as an employer. You'll also have your employer responsibilities, for example deducting PAYE and paying FBT (fringe benefit tax).