The majority of people believe that money granted by the government to help people and businesses during a crisis is tax-free. Otherwise, isn't that the same as giving money with one hand and then taking it with the other?
But, the tax laws don’t work like that. To make a payment tax-free, legislation is required to enable it to be classified as exempt income or non-assessable non-exempt income. In general, any income received will be assessable unless the Government has legislated for it to be tax-free. JobKeeper for example was not tax free and anyone who received it in 2020-21 will need to declare it in their income tax return. Businesses also will need to declare JobKeeper income in their tax return even if the full amount flowed directly to employees.
The Prime Minister has declared that the COVID-19 Disaster Payment will be tax-free, and legislation to enable this move is currently being debated in Parliament. Prior to this, payments to primary producers and small companies for flood recovery grants given between February 19 and March 31, 2021 were tax-free. However, some payments, such as the Pandemic Leave Disaster Payment, are taxed.
The Treasurer has also been given the authority to make COVID-19 aid supplied by the States and Territories tax-free, but only from September 13, 2020, and only if the States and Territories request it. It's understandable if you're perplexed. As a result, depending on the type of assistance you received and from whom, you may face a variety of tax consequences.
Only a few Victorian business grants are currently tax-free. New South Wales, Queensland, and South Australia have yet to declare recent business grants tax-free (but we expect that this will change).
The basic rule is that unless a grant is clearly exempt from taxation, it is likely to be taxable. If the grant is related to your ongoing business operations, it will almost certainly be included in your taxable income. Although the situation may be different in circumstances when the payment is made so that the entity can start a new business or stop operating one, there will almost always be some tax ramifications.