Grants usually count as income. Here's what that means for you.

The short answer: yes, in most cases grants are taxable income in Australia when your business receives them. The ATO says government grants and support payments are generally assessable income unless the law specifically makes them non-taxable. GST is a separate question: a grant usually only attracts GST if you give the funder something in return. This is general information, not tax advice.

Winning a grant is a relief. Finding out later that part of it may go to tax can feel like the ground has shifted. The good news is that the rules are fairly consistent, and a little planning before the money lands makes tax time much calmer. This guide explains how the ATO generally treats grants, so you know what to ask your tax agent.

1. The general rule: grants are usually income

If you run a business, the ATO's guidance on what to include in your business's assessable income lists government payments that are assessable alongside your sales and other business income. It says most grants and payments to businesses are assessable income and need to be included in your tax return. Its examples include subsidies for carrying on a business and grants such as amounts received under the Australian Apprenticeships Incentives Program.

The ATO's guidance on government support payments puts the rule plainly: grants or support payments from the government are generally taxable "unless they are specifically made non-taxable". The same page says this applies whether the money arrives as a one-off lump sum or a series of payments.

2. Some grants are made non-taxable by law

The ATO calls these grants non-assessable, non-exempt income, or NANE. If a grant you receive is NANE, you don't include it in your tax return and you don't pay tax on it. A grant only gets this treatment when the law says so.

The ATO's page on what to exclude from your business's assessable income names three groups of NANE grants:

• Certain COVID-19 business support payments. For example, the ATO explains that a small business receiving Victoria's Business Costs Assistance Program Round Two grant could leave it out of its business income, because the Minister had declared that program eligible and the business met the turnover test.
• Certain natural disaster grants. The ATO's disaster support grants page lists them by event, such as Category C grants for Cyclone Seroja in April 2021. It also says that if your disaster grant is not on its list, it is assessable.
• Water infrastructure improvement payments, where the ATO says you can choose to treat payments under certain sustainable rural water programs as NANE income or ordinary income.

Even for these, there are conditions. The ATO says a COVID-19 business grant is only NANE if the program was formally declared, your business met a turnover test and the payment arrived in the right income years. So if you think your grant might be non-taxable, check the ATO's current list for that exact program and confirm with your tax agent.

3. Which tax year the grant belongs to

The ATO's guidance on how government payments affect your tax explains that it depends on your accounting method:

• if your business uses an accruals method, the income is generally counted when your right to the payment arises
• if your business uses a cash method, the income is generally counted when the payment is received.

Grant money and grant spending don't always fall in the same year. You might receive a milestone payment in June and spend it in August. How that plays out in your return depends on your business, so raise it with your tax agent early, ideally before the end of the financial year in which the money arrives.

4. What about the money you spend?

A taxable grant is only half the picture. The other half is what you spend it on. The ATO's disaster grants page says the ordinary rules about deductions apply to expenses you pay for using a business support grant, and gives examples such as replacement trading stock, new assets and repairs to business premises.

The ATO's support payments page has a worked example along the same lines. A café owner receives a taxable $10,000 state government payment, includes it as assessable income, and claims his utility bills and cleaning costs as deductions.

Two things to raise with your tax agent:

• Equipment and other assets bought with grant money have their own rules, so the deduction may not line up neatly with the grant income in the same year.
• Non-taxable grants can change which expenses you can claim, so check how your spending should be treated if your grant is NANE.

GrantAlly's award workspace tracks your spending against the approved budget alongside your obligations and reminders, so you can see what the grant has paid for when you sit down with your tax agent. GrantAlly doesn't give tax advice. See grant reporting.

5. GST and grants

GST works differently from income tax. The ATO's page on grants and sponsorship says that if you're registered for GST, or required to be, you don't pay GST on grant funding unless you make a supply in return for the payment.

So the question is whether you're giving the funder something. The ATO's guidance on grants and sponsorships for not-for-profits explains the difference:

• Usually no supply: a grant generally isn't payment for a supply if you only have to meet the eligibility criteria. The ATO's examples of criteria include operating in a specific location and providing acquittal reporting.
• Likely a supply: you are making a supply if you enter a binding legal obligation to do something, or to not do something, or you provide goods or services. If that supply is taxable, the ATO says you remit one-eleventh of the grant as GST.
• Sponsorship is different: if you give a sponsor advertising, signage or naming rights in return, the ATO treats that as a supply, and GST applies if you're registered.

Read the obligations in your funding agreement closely. If it's unclear, ask the funder and your tax agent before you invoice or lodge your BAS.

6. Not-for-profits and charities

Some community organisations don't pay income tax at all, so a grant doesn't create an income tax bill for them. But that depends on the organisation being income tax exempt, which isn't automatic. The ATO's page on income tax exempt organisations explains the two main routes:

• Charities must be registered with the Australian Charities and Not-for-profits Commission (ACNC) and endorsed by the ATO to be income tax exempt.
• Other not-for-profits may be able to self-assess as exempt if they fit one of the categories in the tax law, such as community service, cultural, sporting or health organisations, and meet the requirements. From 1 July 2023, those with an active ABN need to lodge an annual NFP self-review return.

The ATO also says a charitable not-for-profit that doesn't register with the ACNC can't self-assess as exempt and may need to lodge a tax return. GST is a separate test again: an exempt organisation that is registered for GST still needs to check whether a grant is payment for a supply.

7. Keep records from day one

Good records make every tax question about a grant easier to answer. The ATO's record-keeping rules for business say you're legally required to keep records of your business transactions, and that most records need to be kept for five years.

For a grant, keep these together:

• the grant guidelines and your signed funding agreement
• letters or emails confirming the amount and payment dates
• bank records showing when each payment arrived
• invoices and receipts for everything you spent the grant on
• your acquittal or progress reports, and any approved budget changes
• any written advice from the funder or your tax agent about GST or tax.

The same records help with your grant acquittal too.

8. When to talk to a registered tax agent

This guide covers the general position. Your own answer depends on your business structure, your accounting method, the program and the terms of your funding agreement. It's worth speaking to a registered tax agent or BAS agent, or contacting the ATO, when:

• you want to know the tax and GST position before you sign
• you think your grant might be non-taxable
• the grant is paid across two financial years, or near 30 June
• you're buying equipment or other assets with the grant
• you're a not-for-profit and aren't sure of your income tax status.

You can check that a tax or BAS agent is registered on the Tax Practitioners Board register. The TPB notes that, generally, only registered agents can charge a fee for tax advice.

Frequently asked questions

Do I have to pay tax on a small business grant?

Usually, yes. The ATO says government grants to businesses are generally assessable income unless the law specifically makes them non-taxable. Check the ATO's current list of non-taxable grants and confirm with a registered tax agent.

Is a disaster recovery grant taxable?

It depends on the grant. The ATO says disaster support grants for business are assessable unless they have been declared non-taxable, and it keeps a list of the ones that are. If your grant isn't on that list, the ATO treats it as assessable.

Do I charge GST on a grant I receive?

Usually not, if you only had to meet the eligibility criteria. The ATO says GST may apply if you make a supply in return, such as entering a binding obligation to deliver services, and you're registered or required to be registered for GST.

Is this tax advice?

No. This guide is general information based on ATO guidance and doesn't consider your circumstances. For advice about your situation, speak to a registered tax agent or contact the ATO.