Are COVID-19 grants and funding tax free?

Most people would think that money provided by the Government to support people and business during a pandemic would be tax free. Otherwise, it’s like giving money with one hand and then taking it away with the other, right?

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 was not tax free

All JobKeeper payments received in 2020-2021 are assessable as ordinary income of the business eligible to receive the payments. The normal rules for deductibility apply for the amounts the business pays to its employees where those amounts are subsidised by the JobKeeper payment.
If your employees are paid wages to construct or create assets, the normal rules apply for:

  • the cost of depreciating assets and capital works, and
  • the cost base of CGT assets.

Subject to those rules, the fact that wages have been subsidised by JobKeeper payments does not prevent them from being included in the relevant tax cost of an asset.
The JobKeeper payment is not subject to GST and is not reported at GST labels on your business activity statement (BAS). However, it should be reported at label T1 in your BAS if you are registered for PAYG instalments.

As an employee or sole trader receiving JobKeeper amounts in or as a replacement for your wage or salary, you need to include these amounts in your tax return.

COVID-19 Disaster Payment – tax-free

At the Federal Government level, the Prime Minister has announced that the COVID-19 Disaster Payment will be tax free.

If you’ve recently applied for the COVID-19 Disaster Payment with Services Australia and received the payment on or after 1 July 2021, you won’t need to include the amount as assessable income in your tax return next year.

If you received a COVID-19 Disaster Payment due to the Greater Melbourne lockdowns in the 2020–21 income year and you haven’t yet lodged your 2020–21 tax return, you don’t need to include the payment as assessable income when you lodge.

If you have already lodged your 2020–21 tax return and included the payment as assessable income, you should amend your return because these payments are no longer taxable. You may get a refund.

You can amend your tax return online through myGov or your registered tax agent. You can also lodge an amendment form or send a letter. Your amended taxable income will be provided to Services Australia for assessment for family assistance and Child Support purposes.

Other payments however, such as Pandemic Leave Disaster Payment, remain taxable.

State & Territory Grants

The Treasurer has also been granted the power to make State and Territory grants tax-free but only from 13 September 2020, and only if they request the Commonwealth Government to make it tax free. If you’re confused, it’s not surprising. The result is a mix of tax treatments depending on what support you received and from whom. To date, only a series of Victorian business grants are tax-free (but we expect more will be made tax free).

In conclusion

The general rule is that grants are likely to be taxable unless they are specifically excluded from tax. If the grant relates to your continuing business activities, then it is likely to be included in assessable income for income tax purposes.