Government grants, subsidies, and business support payments have been a recurring feature of Australian business life since COVID, and they haven't stopped — state business grants, export development grants, and industry-specific subsidies continue to flow. Each requires careful classification: is it income or capital? When is it recognised? Does GST apply? And does the matching principle require deferral?
The Income vs Capital Distinction
The starting point is whether the grant is revenue in nature (assessable as ordinary income) or capital in nature (potentially outside ordinary income, though possibly subject to CGT).
Revenue Grants
Most government grants to small and medium businesses are revenue in nature — they're to support business operations, offset operating costs, or compensate for lost income. These are assessable as ordinary income under section 6-5 of the ITAA 1997.
Examples:
- State COVID business support grants (most were revenue assessable)
- Tourism industry support grants
- Training subsidies
- Export market development grants (EMDG) — assessable when received
Capital Grants
A grant is capital in nature if it's directed at acquiring or improving a specific capital asset — for example, a government co-contribution for purchasing equipment, or a regional development grant tied to construction of a new facility. These may be assessable under the CGT provisions rather than as ordinary income, and the timing and character depends on the specific terms.
For a capital grant, the most common treatment is to reduce the cost base of the relevant asset:
DR Cash / Bank $X,XXX
CR Asset at Cost (reduction) $X,XXX
This means depreciation runs on the net cost (after the grant), which gives a lower annual deduction but a lower assessable income in the year of receipt.
The ATO's position (confirmed in Tax Determination TD 2006/31 and subsequent guidance) is that capital grants may be assessable as ordinary income or CGT proceeds depending on the circumstances — the character follows the receipt. If the grant is simply "money for the business to do something," it's ordinary income.
JobKeeper — Legacy Reconciliations
JobKeeper ended in March 2021, but some practices still encounter legacy reconciliation issues:
- Timing differences: JobKeeper was assessable in the period it was received (cash basis), but some businesses on accruals may have accruals entries to clean up
- Overpayments: The ATO required repayment of some JobKeeper amounts. These repayments reduce the original assessable income — include as a deduction or as an offset to income in the year of repayment (not by amending prior year returns, unless the original amount was never assessable)
- Statement residue: Some clients still have legacy ATO payment descriptions appearing in their imported statements when searching historical transactions — code these to a historical JobKeeper income account with a clear description
Export Market Development Grants (EMDG)
EMDG provides cash reimbursements for eligible export promotion expenses. Key bookkeeping points:
- Assessable when received: EMDG is ordinary income in the income year received (typically the year the grant payment is made, not the year the application is submitted)
- No GST: EMDG payments from Austrade are not subject to GST — they're government grants, not consideration for a supply
- Matching principle: If the underlying promotion expenses were deducted in a prior year, the EMDG receipt in a later year still creates assessable income in the year received. There's no ability to amend the prior year deductions
Journal on receipt:
DR Cash / Bank $XX,XXX
CR EMDG Grant Income $XX,XXX
No GST implications for the recipient.
GST Treatment of Grants
This is the most commonly misunderstood aspect. Most government grants are NOT subject to GST because they are not consideration for a taxable supply. A grant is typically an unconditional or conditions-based payment from government that doesn't require the business to provide anything in return to the government.
The ATO confirmed this in GSTR 2012/2: a payment is only subject to GST if it's consideration for a supply. A grant that's contingent on performance (e.g., achieving certain employment targets, submitting acquittal reports) is still generally not a taxable supply — the conditions are grant conditions, not a supply obligation.
Exception: where the grant involves a specific supply to the government. If a business receives a "grant" to provide training services to government employees, that arrangement may actually be a fee-for-service arrangement. The substance, not the label, determines GST treatment.
Practical Check
When a grant arrives:
- Read the grant agreement: does the business have to provide something to the government in return?
- If yes → likely a taxable supply → 10% GST may apply → issue a tax invoice
- If no → payment is outside the GST system → no GST, no ITC on the grant receipt
Include grants outside the GST system at label G3 (other GST-free sales) or not at all on the BAS — they are simply not reportable in the GST section. They will appear in taxable income but not in GST.
State Business Grants
State government grants vary widely in their GST and income tax treatment. Some examples from recent years:
| Grant | GST | Income Tax |
|---|---|---|
| NSW Small Business Support Grant (COVID era) | GST-free | Assessable |
| Vic Business Continuity Fund | GST-free | Assessable |
| QLD Business Basics Grant | GST-free | Assessable |
| SA Hospitality Industry Support | GST-free | Assessable |
The federal government has occasionally legislated specific grants to be non-assessable non-exempt (NANE) income. The key example was the COVID-19 business support grants in 2021 — many state grants were declared NANE by legislative instrument, meaning they were entirely outside the income tax system for eligible businesses. Check the specific legislative status of any grant before including it in assessable income.
Deferred Grant Income — The Matching Principle
When a grant is tied to a specific future activity or period, the matching principle under AASB 120 (Government Grants) requires deferral of recognition until the conditions are met.
Example: A tourism operator receives a $50,000 regional marketing grant in June 2026, with the condition that it must be spent on marketing activities in the 12 months to June 2027. At 30 June 2026:
DR Cash / Bank $50,000
CR Deferred Grant Income (liability) $50,000
As the marketing expenditure is incurred through FY2027:
DR Deferred Grant Income $XX,XXX
CR Grant Income $XX,XXX
For tax purposes, the ATO may take a different timing view — assessable in the year received unless specific conditions create an obligation to repay if conditions aren't met. If the grant is fully repayable if conditions aren't met, the income may legitimately be deferred for tax. Seek specific advice if material amounts are involved.
Tracking in ReconLink
Government grant payments typically arrive as direct credits from state or federal agencies — identifiable by the payer name in the imported bank statement (CSV, Excel or PDF, or forwarded to your per-client email inbox). Create a dedicated transaction coding rule in ReconLink for each grant program your practice clients receive. Label them clearly (e.g., "EMDG Grant 2026," "Regional Tourism Grant — Deferred") so that when BAS preparation time comes, the coding is clear and the GST treatment is pre-configured as N-T (not taxable) rather than GST.
This prevents the common error of one-click coding to a "miscellaneous income" account with GST applied — which overstates GST collected and creates a reconciling item that requires an amendment.