The State Government announced on 1 April 2017 that a Multi Function Penitentiar

Question

The State Government announced on 1 April 2017 that a Multi Function
Penitentiary (MFP) would be built on land at Gillman in South Australia that
has been vacant for many years since the failed Multi Function Polis initially
proposed for the site. This MFP will involve a uniquely integrated “one stop”
concept of law and order where alleged criminals will be charged, tried and
imprisoned all at the one time. The Government believes the benefits of such
a concept will be to reduce by at least one-third the cost of administering law
and order in the community, and alleviate overcrowding in other prisons. It
decided that the MFP should be privately built, owned and operated.
After seeking expressions of interest, the Government entered into
negotiations with Servcorp Pty Ltd (Servcorp), a company that carries on the
business of developing prison business practices and operating systems, and
implementing them in return for a fee. Servcorp has a wholly owned
subsidiary, Prisoncorp Pty Ltd (Prisoncorp), that carries on the business of
operating and managing prisons in other Australian States. In some of those
States, Prisoncorp has also been responsible for building the prison operated
and managed by it. Both companies were incorporated in Australia.
The negotiations were undertaken by the Government and Servcorp in South
Australia and resulted in the Government agreeing to:
(1) Pay to Prisoncorp a grant of $10m, which was required to be applied by
Prisoncorp towards the cost of it building the MFP;
(2) Transfer to Prisoncorp at a nil cost to it land having a value of $2m, on
which Prisoncorp was required to build the MFP;
(3) Pay to Prisoncorp an annual fee of $20m, indexed annually to increases
in the consumer price index, for it operating the MFP; and
(4) Pay to Servcorp a lump sum payment of $5m in consideration for
Servcorp exclusively making available to the Government information
about its business practices and systems for operating prisons.
These terms are set out in a contract that is being entered into and executed
here by all three parties.
You have been consulted by Prisoncorp and Servcorp before they execute the
contract. On the basis that they are taxpayer company entities that are
Australian residents, you are required to outline for each of them whether any
of the receipts in (1) to (4) are assessable income, giving brief reasons for your
answer.

Explanation / Answer

1) Grant - Some specific payments, grants and subsidies that are received from government are needed to be included in your assessable income. So, Government agreeing to pay to Prisoncorp a grant of $10m, which was required to be applied by Prisoncorp towards the cost of it building the MFP will be included in your assessable income.

2). Cost of Land will not be included in the assessable income as Prisoncorp is providing services and not owning it.

3). Annual fee will be included in the assessable income as Prisoncorp is getting an annual fee for it operating the MFP (i.e. providing the services).

4). Lump sum payment will be included in the assessable income as is receiving the consideration for
for providing to the Government information about its business practices and systems for operating prisons.

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