Receiving money from a government-funded program doesn’t automatically mean the income is tax-free.
If your business provides services through a government-funded program, it can be easy to assume that payments received from the government — or through a government program — are treated differently for tax purposes.
That’s not necessarily the case.
The ATO has reminded service providers that payments received for delivering services under participating Commonwealth programs will generally form part of their assessable business income.
Government Money Can Still Be Taxable
The important distinction is that the source of the payment doesn’t necessarily determine its tax treatment.
If your business is being paid to provide goods or services, those payments will generally need to be considered as part of your business income, even where the funding ultimately comes from a government program.
This can affect businesses operating across a range of industries, including:
- Disability support services
- NDIS-related services
- Aged care
- Childcare
- Hearing services
- Veteran health services
- Other services delivered under Commonwealth-funded programs
If your business receives these types of payments, it’s important to make sure they’re being recorded and reported correctly.
Don’t Assume It’s Exempt
Treating government-funded payments as non-taxable without confirming their tax treatment can create problems later.
If income isn’t included correctly in your business records or tax return, you could end up with an unexpected tax liability, particularly if significant amounts have been involved.
It’s also important to keep appropriate records supporting the payments you receive, the services provided and how the income has been treated for tax purposes.
The ATO Can Check the Numbers
Government agencies provide information to the ATO about payments made under various government programs. This means the ATO may be able to compare information it receives about payments made to your business with the income reported in your tax return.
If the figures don’t match, you may be asked to explain the difference.
Keeping accurate records and reporting the income correctly from the outset can help avoid unnecessary questions and potential problems down the track.
What Should Your Business Do?
If your business receives payments through a government-funded program, don’t rely on the assumption that the income is tax-free simply because the funding comes from a government source.
Instead:
- Record the payments accurately in your business accounts.
- Keep supporting documentation and records.
- Confirm how the payments should be treated for tax purposes.
- Make sure the relevant income is correctly reported in your tax return.
- Seek professional advice if you’re unsure about the treatment of a particular payment.
Unsure How Your Funding Should Be Treated?
Government-funded programs can have specific rules and requirements, and the tax treatment can depend on the nature of the payment and the services being provided.
If your business receives government grants, program payments or other government-funded income and you’re unsure how it should be treated, talk to us before lodging your tax return.
Getting the treatment right from the beginning can help you avoid unexpected tax bills and give you greater confidence that your business records are accurate and up to date.
Contact us today to get the right advice and avoid future headaches.