Small business grants to be income tax-free under new legislation

Small business grants designed to help businesses recover from the coronavirus economic crisis will not be subject to income tax under new legislation before the federal parliament.

The federal government introduced the legislation last week, following a budget night promise from Treasurer Josh Frydenberg to treat Victorian business support grants as non-assessable, non-exempt income for tax purposes.

The government said at the time the arrangement would be extended to grants offered by all states and territories on an application basis.

The Treasury Laws Amendment (2020 Measures No.5) Bill 2020 is now before the House of Representatives and, if passed by parliament, will apply to the 2020-2021 income year, as well as later income years.

According to the bill’s explanatory memorandum, the tax concession will be available to businesses with less than $50 million in annual turnover.

The arrangements will be applied to grants announced on or after September 13, 2020, and payments made from the date until June 30, 2021.

Grant programs will need to be declared eligible by the minister in order for payments to be treated as non-assessable, non-exempt income, and this eligibility will be based on whether the program responds directly to the economic fallout from the COVID-19 pandemic.

To be eligible, grant programs must also be designed to support businesses that have had restrictions placed on their operations, including geographical-based public health orders, such as those used during the Victorian lockdowns.

“These eligibility requirements ensure that only payments made under grant programs that are directly concerned with managing the impacts of the coronavirus for affected businesses will obtain concessional tax treatment,” reads the memorandum.

The goal is to ensure the grant payments contribute to eligible businesses’ cashflow, according to the legislation.

“This is because, in addition to the payments not being subject to income tax (by being treated as non-assessable, non-exempt income), businesses will continue to be able to claim deductions for eligible expenses made with the grant payments,” it reads.