Quality Clothing Pty Ltd is a clothing manufacturer which specialises in making shirts for men. The company has operated from premises owned by it in Epping for the last 24 years. Each year, the company has been entitled to and received a bounty payment from the Federal Government under its policy to subsidise and assist Australian clothing manufacturers. The amount of the payment is based upon the number of shirts manufactured and a percentage of factory overheads.

As part of its desire to accelerate industry restructuring and modernisation, the Federal Government has decided to introduce an alternative scheme. Under the new scheme, a once off grant is paid to the clothing manufacturers who qualify and elect to apply for the grant. The amount of the grant is calculated by reference to an applicant's estimate of rationalisation and modernisation costs. Payment of the grant is conditional upon an applicant agreeing to forgo its entitlement to future bounty payments.

Quality Clothing Pty Ltd wishes to modernise its clothing manufacturing plant and equipment and qualifies for a grant. It has decided to apply for the grant and use the payment to purchase new modern plant costing $1.6 million. It will then dispose of its existing plant and equipment. Indeed, the company has already received offers for this plant and equipment as follows:

Item Date Original Dep Value Offer

Acquired Cost Price

Semi-automatic cutter June 2009 $70,000 Nil $40,000

Semi- automatic stitcher June 2012 210,000 130,000 $80,000

Automatic Presser June 2015 $75,000 25,000 $95,000

Required:

Discuss the tax implications for Quality Clothing Pty Ltd if it receives the $1.6 million grant and accepts the offers which have been made for its existing plant and equipment. In your discussion, address what (if any) arguments could be advanced in support of the grant not constituting assessable income of Quality Clothing Pty Ltd.

Advise/Theory question