Class Ruling

CR 2005/107

Income tax: treatment of payments received under the Great Barrier Reef Marine Park Structural Adjustment Package 2004:
• Business Exit (fishery related business) Assistance; and
• Business Advice Assistance

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FOI status:

may be released

Preamble

What this Class Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the 'tax laws' identified below apply to the defined class of persons who take part in the arrangement to which this Ruling relates.

Tax law(s)

2. The tax laws dealt with in this Ruling are:

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section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997);

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section 15-10 of the ITAA 1997;

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Subdivision 20-A of the ITAA 1997;

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subsection 20-25(5) of the ITAA 1997;

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subsection 20-30(1) of the ITAA 1997;

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section 25-50 of the ITAA 1997;

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section 26-55 of the ITAA 1997;

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section 40-305 of the ITAA 1997;

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section 40-880 of the ITAA 1997;

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Part 3-1 of the ITAA 1997;

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section 104-25 of the ITAA 1997;

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section 104-235 of the ITAA 1997;

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Division 110 of the ITAA 1997;

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Division 112 of the ITAA 1997;

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Subdivision 115-A of the ITAA 1997;

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Subdivision 115-B of the ITAA 1997;

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Subdivision 115-C of the ITAA 1997;

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section 116-40 of the ITAA 1997;

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section 118-20 of the ITAA 1997;

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section 118-24 of the ITAA 1997;

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Part 3-3 of the ITAA 1997;

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Division 152 of the ITAA 1997;

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section 392-80 of the ITAA 1997; and

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section 995-1 of the ITAA 1997.

Class of persons

3. The class of persons to which this Ruling applies is applicants who applied for and received payments under the Business Exit (fishery related business) Assistance and/or Business Advice Assistance components of the Great Barrier Reef Marine Park Structural Adjustment Package 2004 (the Package).

Qualifications

4. The Commissioner makes this Ruling based on the precise arrangement identified in this Ruling.

5. The class of persons defined in this Ruling may rely on its contents provided the arrangement actually carried out is carried out in accordance with the arrangement described in paragraphs 10 to 21.

6. If the arrangement actually carried out is materially different from the arrangement that is described in this Ruling, then:

•

this Ruling has no binding effect on the Commissioner because the arrangement entered into is not the arrangement on which the Commissioner has ruled; and

•

this Ruling may be withdrawn or modified.

7. This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Commonwealth Copyright Administration

Attorney General's Department

Robert Garran Offices

National Circuit

Barton ACT 2600

or posted at: http://www.ag.gov.au/cca

Date of effect

8. This Ruling applies from 1 July 2004. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR92/20).

Withdrawal

9. This Ruling is withdrawn from 1 July 2006.

Arrangement

10. The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description are:

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Application for Class Ruling from the Department of the Environment and Heritage dated 7 October 2004;

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Great Barrier Reef Marine Park Structural Adjustment Package 2004 - amended information package and request for offer - October 2004; and

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Great Barrier Reef Marine Park Structural Adjustment Package 2004 (GBRMP SAP 2004) - Amended Business Exit (fishery related business) Assistance Guidelines - September 2004.

11. Rezoning of the Great Barrier Reef Marine Park (the GBRMP) came into effect from 1 July 2004. In accordance with the Australian Government's Marine Protected Areas and Displaced Fishing policy, the Government is providing a structural adjustment package to ensure the fair and equitable treatment of those fishers, fishery related businesses, employees and communities that can demonstrate they have experienced or will experience negative impacts due to the rezoning.

12. The overall objectives of the Package are:

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to assist fishers, fishery related businesses, employees and communities adversely affected by the rezoning; and

•

to manage in the most cost effective manner any displaced fishing effort that has unsustainable ecological or economic impacts.

Business Exit (fishery related business) Assistance

13. The Business Exit (fishery related business) Assistance component of the Package is available for businesses that:

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have been rendered financially unviable; and

•

can demonstrate that their circumstances have resulted directly from the rezoning of the GBRMP; and

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can demonstrate that the impacts of the rezoning are so great that exiting the industry is the only realistic option; and

i.

have been directly involved in the seafood wholesaling, retailing or processing industry for the three years to 1 July 2004 and be able to demonstrate the impact of the rezoning on their business; or

ii.

have been directly dependent on the commercial fishing industry for the three years to 1 July 2004 and be able to demonstrate the proportion of their income that is or was derived from the direct supply of goods and services to the commercial fishing industry and be able to demonstrate the impact of the rezoning on their business; or

iii.

have been directly involved in the supply of goods or services to the recreational fishing sector for the three years to 1 July 2004 and be able to demonstrate the proportion of their income that is or was related to fishing undertaken in areas that are now closed to recreational fishing; or

iv.

can demonstrate that their situation has been caused by a combination of ii and iii; or

v.

have been directly involved in the charter fishing industry for the three years to 1 July 2004 and be able to demonstrate the proportion of their income that is or was derived from areas of the GBRMP that are now not available for charter fishing; or

vi.

have been a lessee of a commercial fishing licence/ holder of a licence on a temporary transfer for the three years to 1 July 2004 and be able to demonstrate that either: the licence they were leasing is no longer available as a result of the licence offer process and that they were not able to submit a joint offer in the licence buyout; or the proportion of their income that is or was derived from areas of the GBRMP that are now not available to commercial fishing and they were unable to develop a joint offer with the licence owner.

14. There are 4 steps in the Business Exit (fishery related business) Assistance process:

Step 1 - An applicant must complete the Fishery Related Business Exit Assistance application form - this step includes the applicant: demonstrating that their business has been or will be significantly impacted by the rezoning; estimating an exit price for the business; and outlining an exit strategy. The Queensland Rural Adjustment Authority (QRAA) will complete an initial assessment as to the applicant's eligibility. If the applicant is considered to be eligible for assistance, the QRAA will notify the applicant and arrange for a QRAA or independent assessor to conduct a valuation of the business.

Step 2 - Applicants will be notified of the valuer's report following its receipt. Applicants may be invited to submit a revised application form at this time, reflecting the value placed on the business by the valuation.

Step 3 - The Department of the Environment and Heritage makes a formal determination of the eligibility for exit assistance and the level of assistance that may be granted.

Step 4 - Applicants will be informed of the final offer and invited to accept the offer. Applicants will need to accept the offer within 28 days of receipt of the offer and agree to complete the exit strategy within six months of the offer being accepted. A one-off payment will be made once the exit strategy has been completed and upon provision to the QRAA of all necessary documentation including receipts and other proof of sale or transfer of assets.

15. In the case of licence lessees/temporary transferees, any nets associated with the fishing operation must be surrendered to the Queensland Boating and Fisheries Patrol. The surrender of nets would be considered as having completed a relevant businesses exit strategy.

16. The recommended Business Exit (fishery related business) Assistance amount would be determined as follows:

*Clause 2(i) of the GBRMP SAP 2004 - Amended Business Exit (fishery related business) Assistance Guidelines - September 2004 (GBRMP SAP 2004 Guidelines) provides that the applicant can seek reimbursement for any other extraordinary expenses or losses incurred as a result of the rezoning. These could include:

i.

Reasonable external costs of the applicant's accountant in the preparation of the Business Exit (fishery related business) Assistance application (detailed invoices, including time and personnel involved, may be required to support this element).

ii.

Any statutory redundancy entitlements to employees resulting from the need to retrench those employees directly as a result of the rezoning.

The statutory redundancy entitlements of employees must be determined by the applicant in accordance with the relevant terms of employment of each employee. Where an employee's terms of employment are bound to a State or Federal Award or to a certified enterprise bargaining agreement, then his/her entitlement must be determined in compliance with that Award or agreement. Applicants are advised to seek guidance from the relevant employer association and/or union in determining the statutory redundancy entitlement of each employee.

Payments made to employees in lieu of notice will not normally be eligible for reimbursement. Such payments will only be considered for reimbursement in extraordinary circumstances and where the business can clearly demonstrate that it could not reasonably have required its employees to work out their required period of notice.

Statutory redundancy entitlements covered by the Business Exit (fishery related business) Assistance component of the Package may be claimed only if they have been assessed by the QRAA as a legitimate cost of business closure. If they have not been so assessed, they will not be reimbursed.

iii.

Expected or actual loss on sale of assets. The amount of those expected or actual losses being the difference in the value of the asset determined under 2(g)(i) and the current auction value determined by the independent plant and equipment valuer or that realised from an arms length and/or properly advertised commercial disposal. The cost of any auction is not an eligible closedown cost. Applicants should contact the QRAA if they require any further clarification on this matter, or intend to dispose of any assets prior to a valuation report in order to ascertain what information and documentation applicants should retain.

iv.

Site rehabilitation costs (if applicable), which are limited to the rateable land value of the land used under 2(g)(i) or actual cost of rehabilitation whichever is the lesser to a maximum of $100,000.

Partial Business Exit (fishery related business) Assistance

17. Partial Business Exit (fishery related business) Assistance may be considered in certain circumstances. Such circumstances may include where it can be shown that only a distinct part of a business' operations has been directly and adversely affected by the rezoning. For example, if a processing operation has been directly and adversely affected by the rezoning but its wholesaling operation is still viable, the business may seek partial Business Exit (fishery related business) Assistance for the closure of its processing operations and continue its wholesaling operation. If approved for partial Business Exit (fishery related business) Assistance, a business may continue with its remaining operations in the fishery related industry at levels specified in a Partial Deed of Release (see clause 9 GBRMP SAP 2004 Guidelines).

18. In applying for assistance under the Business Exit (fishery related business) Assistance component of the Package, the applicant needs to show that it has considered assistance under the Business Restructuring Assistance component and show that such assistance would not return the business to viability (See clause 2.4 GBRMP SAP 2004 Guidelines).

Business Advice Assistance

19. Applicants can obtain independent professional advice in regards to taxation, legal, and any other potential implications before deciding whether to apply for the Business Exit (fishery related business) Assistance. Under the Business Advice Assistance component of the Package, up to $1,000 may be payable to reimburse eligible applicants for costs associated with obtaining business advice. Applicants for the Business Advice Assistance component must apply for this assistance and must submit receipts to the QRAA.

Components of Business Exit (fishery related business) Assistance and Partial Business Exit (fishery related business) Assistance for income tax purposes

20. The assistance amount comprises separate components which require analysis to determine their income tax consequences. These are:

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a payment for the net value of the business as described in paragraph 16 (value of business less net realisable value of tangible assets). This has the essential quality or character of compensation for the applicant ceasing the whole or a distinct part of a fishery related business. This is referred to in the ruling as 'net value of business'; and

•

reimbursement of extraordinary expenses or losses resulting from ceasing the whole or a distinct part of a fishery related business, as provided in clause 2(i) of the GBRMP SAP 2004 guidelines. Each payment is considered separately in the ruling. However, Clause 2(i)iii provides for an expected loss on sale of assets. This is not a true reimbursement for income tax purposes as there is no actual loss or disposal of an asset. It is essentially part of the compensation for ceasing the whole or a distinct part of a business and any other consequences will depend on the circumstances of the payment.

21. In considering the income tax consequences under the capital gains tax provisions and the uniform capital allowance provisions of the ITAA 1997, different factors are considered but these, and the relevant overlap provisions, are explained in this Ruling.

Ruling

Business Exit (fishery related business) Assistance - net value of business - business ceases

Section 6-5 of the ITAA 1997 - income according to ordinary concepts

22. A payment received under the Business Exit (fishery related business) Assistance component of the Package is not income according to ordinary concepts. The receipt is not assessable income under section 6-5 of the ITAA 1997.

Section 15-10 of the ITAA 1997 - bounty or subsidy

23. A payment received under the Business Exit (fishery related business) Assistance component of the Package is not a bounty or subsidy that is received in relation to carrying on a business. The receipt is not assessable income under section 15-10 of the ITAA 1997.

Capital gains tax

24. A payment received under the Business Exit (fishery related businesses) Assistance component of the Package is subject to the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the ITAA 1997. CGT event C2 under section 104-25 of the ITAA 1997 happens when the entitlement to receive the business exit assistance is satisfied. To the extent that the assistance relates to the disposal of an underlying CGT asset of the business, CGT event A1 under section 104-10 of the ITAA 1997 happens.

Partial Business Exit (fishery related business) Assistance - net value of part of business

Section 6-5 of the ITAA 1997 - income according to ordinary concepts

25. A payment received under the Partial Business Exit (fishery related business) Assistance component of the Package is not income according to ordinary concepts. The receipt is not assessable income under section 6-5 of the ITAA 1997.

Section 15-10 of the ITAA 1997 - bounty or subsidy

26. A payment received under the Partial Business Exit (fishery related business) Assistance component of the Package, being a government payment paid to foster an undertaking, may be characterised as a bounty or subsidy. However, as the bounty or subsidy is not received in relation to carrying on a business it is not assessable income under section 15-10 of the ITAA 1997.

Capital gains tax

27. A payment received under the Partial Business Exit (fishery related businesses) Assistance component of the Package is subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997. CGT event C2 under section 104-25 of the ITAA 1997 happens when the entitlement to receive the partial business exit assistance is satisfied. To the extent that the assistance relates to the disposal of an underlying CGT asset of the business, CGT event A1 under section 104-10 of the ITAA 1997 happens.

Compensation for expected loss on sale of assets in clause 2(i)iii of the GBRMP SAP 2004 Guidelines

Section 6-5 of the ITAA 1997 - income according to ordinary concepts

28. The compensation for the expected loss on sale of assets is not assessable under section 6-5 of the ITAA 1997.

Section 15-10 of the ITAA 1997 - bounty or subsidy

29. The compensation for the expected loss on sale of assets is not assessable income under section 15-10 of the ITAA 1997.

Subdivision 20-A of the ITAA 1997 - assessable recoupment

30. Where a compensation payment is made for the expected loss on sale of a depreciating asset and the taxpayer retains and continues to use the asset, the amount received is not a recoupment of a loss or outgoing. The asset continues to decline in value pursuant to the capital allowance provisions of Division 40 of the ITAA 1997.

Uniform capital allowances

31. Where a balancing adjustment event by way of sale, transfer or surrender occurs for a depreciating asset as part of a business exit strategy for which the assistance is paid, the compensation payment represents part of the termination value of the asset under section 40-305 of the ITAA 1997.

32. Where the compensation payment represents part of the termination value of the asset, the amount is not received as recoupment of the loss or outgoing under subsection 20-25(5) of the ITAA 1997.

Capital gains tax

33. The compensation for the expected loss on the sale of CGT assets, other than depreciating assets for which a balancing adjustment event occurs, is subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997. The compensation is treated as an amount received for the permanent reduction in the value of the underlying asset where there is no disposal of the asset at the time of the receipt. The amount represents a recoupment of the cost base of the asset. If the asset has been disposed of at the time of the receipt, the compensation is treated as additional capital proceeds for the CGT event that happens on the disposal of the asset.

Reimbursements of amounts in clause 2(i)iii of the GBRMP SAP 2004 Guidelines

Reimbursement of actual loss on sale of assets

Section 6-5 of the ITAA 1997 - income according to ordinary concepts

34. The reimbursement of actual loss on sale of assets is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Section 15-10 of the ITAA 1997 - bounty or subsidy

35. The reimbursement of actual loss on sale of assets is not assessable income under section 15-10 of the ITAA 1997.

Subdivision 20-A of the ITAA 1997 - assessable recoupment

36. Where the payment represents part of the termination value of the asset, the amount is not received as recoupment of the loss or outgoing pursuant to subsection 20-25(5) of the ITAA 1997.

Uniform capital allowances

37. Where a balancing adjustment event by way of sale, transfer or surrender occurs for a depreciating asset as part of a business exit strategy for which the assistance is paid, the compensation payment represents part of the termination value of that asset. The payment is taken to have been received under section 40-305 of the ITAA 1997 for the asset where a right to receive the amount arises as a result of the asset's disposal. In this case, the termination value of the asset would include the amount received or receivable under clause 2(i)iii of the GBRMP SAP 2004 Guidelines.

Capital gains tax

38. The reimbursement of the actual loss on the sale of CGT assets, other than depreciating assets for which a balancing adjustment event occurs, is subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997. The reimbursement is treated as additional capital proceeds for the CGT event A1 under section 104-10 of the ITAA 1997 that happens on the disposal of the asset.

Reimbursement of accountant's costs in preparing the Business Exit (fishery related business) Assistance application

Section 6-5 of the ITAA 1997 - income according to ordinary concepts

39. The reimbursement of the reasonable external costs of the applicant's accountant in the preparation of the Business Exit (fishery related business) Assistance application form is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Section 15-10 of the ITAA 1997 - bounty or subsidy

40. The reimbursement of the reasonable external costs of the applicant's accountant in the preparation of the Business Exit (fishery related business) Assistance application form is not assessable income under section 15-10 of the ITAA 1997.

Subdivision 20-A of the ITAA 1997 - assessable recoupment

41. The reimbursement of the reasonable external costs of the applicant's accountant in the preparation of the Business Exit (fishery related business) Assistance application form is assessable income under Subdivision 20-A of the ITAA 1997. This outcome occurs where the applicant's costs are to stop carrying on the business so as to be entitled to a deduction under section 40-880 of the ITAA 1997.

Capital gains tax

42. Any capital gain made on the reimbursement of an amount of reasonable external costs of the applicant's accountant in the preparation of the application for Business Exit (fishery related business) Assistance is reduced under section 118-20 of the ITAA 1997 to the extent that the reimbursement is assessable under Subdivision 20-A of the ITAA 1997.

Reimbursement of any statutory redundancy entitlements to employees resulting from the need to retrench those employees directly as a result of the rezoning

Section 6-5 of the ITAA 1997 - income according to ordinary concepts

43. The reimbursement of any statutory redundancy entitlements paid to employees is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Section 15-10 of the ITAA 1997 - bounty or subsidy

44. The reimbursement of any statutory redundancy entitlements paid to employees is not assessable income under section 15-10 of the ITAA 1997.

Subdivision 20-A of the ITAA 1997 - assessable recoupment

45. The reimbursement of any statutory redundancy entitlements paid to employees is assessable income under Subdivision 20-A of the ITAA 1997 to the extent that such outgoings are deductible under section 40-880 or any other provisions of the ITAA 1997 listed in the table in subsection 20-30(1).

Capital gains tax

46. Any capital gain made on the reimbursement of any statutory redundancy entitlements paid to employees for Business Exit (fishery related business) Assistance is reduced under section 118-20 of the ITAA 1997 to the extent that the reimbursement is assessable under Subdivision 20-A of the ITAA 1997.

Reimbursement of site rehabilitation costs

Section 6-5 of the ITAA 1997 - income according to ordinary concepts

47. The reimbursement of site rehabilitation costs is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Section 15-10 of the ITAA 1997 - bounty or subsidy

48. The reimbursement of site rehabilitation costs is not assessable income under section 15-10 of the ITAA 1997.

Subdivision 20-A of the ITAA 1997 - assessable recoupment

49. Where a deduction is allowable under section 40-880 to stop carrying on a business, the reimbursement of site rehabilitation costs is assessable income under Subdivision 20-A of the ITAA 1997.

Capital gains tax

50. Any capital gain made on the reimbursement of site rehabilitation costs for Business Exit (fishery related business) Assistance is reduced under section 118-20 of the ITAA 1997 to the extent that the reimbursement is assessable under Subdivision 20-A of the ITAA 1997.

Business Advice Assistance

Section 6-5 of the ITAA 1997 - income according to ordinary concepts

51. A payment received under the Business Advice Assistance component of the Package is assessable as ordinary income under section 6-5 of the ITAA 1997.

Capital gains tax

52. Any capital gain made when an amount is paid to the applicant under the Business Advice Assistance component of the Package is reduced under section 118-20 of the ITAA 1997 to the extent that the amount paid is assessable under section 6-5 of the ITAA 1997.

Primary production income

53. Payments received by eligible applicants under the Business Exit (fishery related business) Assistance, Partial Business Exit (fishery related business) Assistance and Business Advice Assistance components are not classed as 'assessable primary production income for the purposes of calculating the 'averaging' concession available under section 392-80 of the ITAA 1997.

Explanation

Business Exit (fishery related business) Assistance - net value of business - business ceases

Section 6-5 of the ITAA 1997 - income according to ordinary concepts

54. Subsection 6-5(1) of the ITAA 1997 provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). However, as there is no definition of 'ordinary income' in income tax legislation it is necessary to apply principles developed by the courts to the facts of a particular case.

55. The Courts have regard to all the circumstances which give rise to the receipt without a disproportionate emphasis upon the form in which the transaction was structured.^[1]

56. The fact that a payment received under the Business Exit (fishery related business) Assistance component of the Package is calculated by using the earnings before interest and tax (EBIT) of the applicant's business does not mean that the payment is income. In DCT (Vic) v. Phillips,^[2] Dixon & Evatt JJ referred to the treatment of a sum as income because it is computed by reference to loss of income as involving 'an erroneous method of reasoning'. Whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. ^[3]

57. The receipt of a payment under the Business Exit (fishery related business) Assistance component of the Package is neither a normal incident of the applicant's business nor is it paid for a purpose for which the applicant's business was carried on. At common law, a compensation receipt generally takes the character of the item it replaces. ^[4] Where the recipient receives compensation for the surrender of a profit earning structure, the compensation is characterised as capital in nature. ^[5]

58. An amount received for going out of business has been held to be a capital receipt. ^[6]

59. The receipt of a payment under the Business Exit (fishery related business) Assistance component of the Package is capital in nature and is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Section 15-10 of the ITAA 1997 - bounty or subsidy

60. Section 15-10 of the ITAA 1997 provides that an amount is included in assessable income if it is:

•

a bounty or subsidy;

•

received in relation to carrying on a business; and

•

not assessable as ordinary income under section 6-5 of the ITAA 1997.

Bounty or subsidy

61. The terms 'bounty' and 'subsidy' are not defined in income tax legislation. The word 'subsidy', as noted by Windeyer J in Placer Development Ltd v. Commonwealth of Australia, ^[7] derives from the Latin 'subsidium' meaning 'an aid or help'. The Macquarie Dictionary, 2001, rev. 3rd edn, defines subsidy as including 'a grant or contribution of money'. The ordinary meaning adopted by case law is aid provided by the Crown (government) to foster or further some undertaking or industry.

62. Following the decisions in Squatting Investments Co Ltd v. Federal Commissioner of Taxation^[8]; Reckitt and Colman Pty Ltd v. FC of T^[9] and First Provincial Building Society Ltd v. Federal Commissioner of Taxation^[10] (First Provincial), it is now well accepted that a 'subsidy' or 'bounty' include a financial grant made by a government. A payment received for the Business Exit (fishery related business) Assistance is a 'subsidy' or 'bounty'.

In relation to carrying on a business

63. The meaning of the expression 'in relation to carrying on a business' was analysed in First Provincial by Hill J when considering former section 26(g) of the ITAA 1936. In his opinion, the word 'in' means 'in the course of' and requires a direct relationship to exist between the bounty, on the one hand, and the carrying on of the taxpayer's business on the other. The words 'in relation to' extend this relationship which means that there may be a less direct relationship between the bounty and 'the carrying on of the business'. However, the relationship must be to the 'carrying on' of the business in contrast to a relationship with the business itself. The expression 'carrying on of the business' looks to the activities of the business which are directed towards the gaining or producing of assessable income rather than merely to the business itself. Hill J said that the expression makes it clear that a bounty received merely in relation to the commencement of a business or the cessation of the business would not be caught.

64. The receipt under the Business Exit (fishery related business) Assistance component of the Package is not received in relation to carrying on the applicant's business as it is received in relation to the cessation of the applicant's business. Accordingly, it is not assessable under section 15-10 of the ITAA 1997.

Capital gains tax

65. CGT event C2 under section 104-25 of the ITAA 1997 happens when the entitlement to receive the business exit assistance is satisfied.

66. However, to the extent that the assistance relates to the disposal of an underlying CGT asset of the business, CGT event A1 under section 104-10 of the ITAA 1997 happens. Taxation Ruling TR 95/35 (Treatment of Compensation Receipts) is the basis for applying the underlying asset approach. In this situation, CGT event C2 does not happen.

CGT event A1 happens to a CGT asset of the business

67. A capital gain is made if the capital proceeds exceed the cost base of the CGT asset and a capital loss is made if the capital proceeds are less than the reduced cost base.

68. The capital proceeds from the CGT event happening to the CGT asset include that part of the amount of business exit assistance that the applicant receives or is entitled to receive that relates to the asset. The lump sum business exit assistance payment is apportioned under section 116-40 of the ITAA 1997 between the various CGT assets to which CGT events happen under the exit strategy and the other components of the entitlement to assistance. The lump sum payment is apportioned on a reasonable basis.

69. The cost base of the CGT asset is calculated under Divisions 110 and 112 of the ITAA 1997. The cost base is reduced by any amount that is a deductible expense (for example, subsection 110-45(1B) of the ITAA 1997).

70. A capital gain or capital loss which results from a CGT event happening to a CGT asset acquired before 20 September 1985 is disregarded.

71. A capital gain can be reduced by the general CGT discount if the relevant requirements of Subdivisions 115-A, 115-B and 115-C of the ITAA 1997 are met.

72. A capital gain can be reduced or deferred by the small business CGT concessions if the asset is an active asset and the other requirements of Division 152 of the ITAA 1997 are met. The concessions available are:

•

small business 15-year exemption;

•

small business 50% active asset reduction;

•

small business retirement exemption; and

•

small business rollover.

73. CGT event K7, under section 104-235 of the ITAA 1997, does not happen if the asset is a depreciating asset that has only been used for taxable purposes and the disposal of the asset amounts to a balancing adjustment event.

74. Where a capital gain or capital loss is made from a CGT event that happens to a depreciating asset, that gain or loss may be disregarded under section 118-24 of the ITAA 1997.

CGT event C2 happens to the entitlement to receive the business exit assistance

75. CGT event C2 under section 104-25 of the ITAA 1997 happens when the entitlement to receive the business exit assistance is satisfied. This event happens at the time that the QRAA makes the one-off payment to the applicant to end their right to assistance.

76. A capital gain is made if the capital proceeds exceed the cost base of the entitlement and a capital loss is made if the capital proceeds are less than the reduced cost base.

77. The capital proceeds from the CGT event that happens to the entitlement is that part of the business exit assistance received that does not relate to the CGT assets where the CGT consequences are worked out under CGT event A1 (refer to paragraphs 67 to 72).

78. The cost base of the right is calculated under Divisions 110 and 112 of the ITAA 1997. It includes the costs of applying for the business exit assistance. The market value of the entitlement is not included as part of the cost base because the market valuation rules do not apply to the acquisition of the entitlement from the QRAA. The cost base is reduced by any amount that is a deductible expense (for example, subsection 110-45(1B) of the ITAA 1997).

79. A capital gain cannot be reduced by the general CGT discount as the capital gain does not result from a CGT event happening to a CGT asset that was acquired by the applicant at least 12 months before the CGT event happened.

80. A capital gain may be reduced or deferred by the small business CGT concessions. Refer to paragraph 72.

Partial Business Exit (fishery related business) Assistance - net value of part of business

Section 6-5 of the ITAA 1997 - income according to ordinary concepts

81. The principles in paragraphs 54 to 59 apply equally to a payment under the Partial Business Exit (fishery related business) Assistance component of the Package. The receipt is neither a normal incident of the applicant's business nor is it paid for a purpose for which the applicant's business is carried on.

82. A receipt for agreeing to give up part of the profit-earning structure has been held to be a capital receipt. ^[11]

83. The receipt under the Partial Business Exit (fishery related business) Assistance component of the Package payable to the applicant to compensate for discontinuing a distinct part of the applicant's business' operations is capital in nature and is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Section 15-10 of the ITAA1997 - bounty or subsidy

84. The receipt under the Partial Business Exit (fishery related business) Assistance of the Package as compensation for discontinuing a distinct part of a business may be characterised as a bounty or subsidy being a government payment paid to foster an undertaking. However, a payment that is received only for giving up part of the profit yielding structure of the business is not received in relation to the carrying on of a business. Accordingly, in the example given in clause 9 of the GBRMP SAP 2004 Guidelines (at paragraph 17), a payment for the discontinuation of the processing activity is not assessable income under section 15-10 of the ITAA 1997.

Capital gains tax

85. CGT event C2 under section 104-25 of the ITAA 1997 happens when the entitlement to receive the partial business exit assistance is satisfied.

86. However, to the extent that the assistance relates to the disposal of an underlying CGT asset of part of the business, CGT event A1 under section 104-10 of the ITAA 1997 happens. Taxation Ruling TR 95/35 (Treatment of Compensation Receipts) is the basis for applying the underlying asset approach. In this situation CGT event C2 does not happen.

CGT event A1 happens to a CGT asset of part of the business

87. The principles set out in paragraphs 67 to 74 apply equally when the Partial Business Exit (fishery related business) Assistance payment is received.

CGT event C2 happens to the entitlement to receive the partial business exit assistance

88. The principles set out in paragraphs 75 to 80 apply equally when the Partial Business Exit (fishery related business) Assistance payment is received.

Compensation for expected loss on sale of assets - clause 2(i)iii of the GBRMP SAP 2004 Guidelines

89. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed.

90. The 'reimbursement' of 'expected' losses on sale of assets, being the difference in the value of the asset determined under clause 2(g)(i) of the GBRMP SAP 2004 Guidelines and the current auction value determined by the independent plant and equipment valuer is not a reimbursement. The receipt is a compensation for the expected loss on sale of assets and is part of the Business Exit (fishery related business) Assistance. Consequently, the compensation has the same character as that receipt. The compensation is not assessable income under either section 6-5 or 15-10 of the ITAA 1997.

Subdivision 20-A of the ITAA 1997 - assessable recoupment

91. Where a balancing adjustment event by way of sale occurs for a depreciating asset as part of a business exit strategy for which the assistance is paid, the compensation payment represents part of the termination value of that asset and, therefore, not included in an amount of recoupment assessed under Subdivision 20-A of the ITAA 1997.

92. Where a compensation payment is made for the expected loss on sale of a depreciating asset and the taxpayer retains and continues to use the asset, the amount received is not a recoupment of a loss or outgoing. The asset continues to decline in value pursuant to the capital allowance provisions of Division 40 of the ITAA 1997.

Capital gains tax

93. The compensation for the expected loss on the sale of CGT assets, other than depreciating assets for which a balancing adjustment event occurs, is subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997. The compensation is treated as an amount received for the permanent reduction in the value of the underlying asset where there is no disposal of the asset at the time of the receipt. The amount represents a recoupment of the cost base of the asset.

94. If the asset has been disposed of at the time of the receipt, the compensation is treated as additional capital proceeds for the CGT event that happens on the disposal of the asset. The principles set out in paragraphs 67 to 74 apply equally when the reimbursement of the actual loss on the sale of an asset is received.

Reimbursements of amounts in clause 2(i) of the GBRMP SAP 2004 Guidelines

Section 6-5 of the ITAA 1997 - income according to ordinary concepts

95. The reimbursement of amounts in clause 2(i) of the GBRMP SAP 2004 Guidelines is not made for a purpose which is part of the applicant's trade but rather for the purpose of assisting the applicant with the costs of closing business operations or a distinct part of the business operations. The reimbursement of those amounts is capital in nature and is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Section 15-10 of the ITAA 1997 - bounty or subsidy

96. The reimbursement of amounts in clause 2(i) of the GBRMP SAP 2004 Guidelines are not received in relation to carrying on the applicant's business but in relation to the cessation of the applicant's business or a distinct part of that business. Accordingly, the reimbursement of these amounts is not assessable under section 15-10 of the ITAA 1997.

Subdivision 20-A of the ITAA 1997 - assessable recoupment

97. Under Subdivision 20-A of the ITAA 1997, a taxpayer's assessable income may include an amount received as recoupment of a loss or outgoing if an amount is deductible for the loss or outgoing and the amount received is not otherwise assessable income.

98. An amount that is received as recoupment of a loss or outgoing is only an assessable recoupment for the purposes of Subdivision 20-A if it is a recoupment of a loss or outgoing specified in the table in section 20-30 of the ITAA 1997 and an amount for that loss or outgoing is deductible in the current income year or in an earlier income year. A recoupment of a loss or outgoing includes any kind of reimbursement (subsection 20-25(1) of the ITAA 1997).

99. Costs of the applicant's accountant in the preparation of the Business Exit (fishery related business) Assistance application form, statutory redundancy entitlement, and site rehabilitation costs are deductible under section 40-880 of the ITAA 1997 to the extent that they are costs to stop carrying on a business and not deductible under any other provision of the ITAA 1997.

100. The reimbursement of the costs of the applicant in respect of accountant's application, redundancy payments and site rehabilitation costs can constitute assessable income under Subdivision 20-A of the ITAA 1997 where the applicant's costs are to stop carrying on the business so as to be entitled to a deduction under section 40-880 of the ITAA 1997. To the extent that the assessable income will be offset by the deduction under section 40-880 of the ITAA 1997 of identical amounts over a five year period, the outcome is a neutral tax effect for the applicant.

101. In respect of the redundancy payments by the applicant, section 25-50 of the ITAA 1997 can potentially apply to allow a deduction (or be limited by section 26-55 of the ITAA 1997).

Uniform capital allowances

102. The uniform capital allowance provisions may include the compensation for the actual loss on sale of a depreciating asset as part of the asset's termination value. The amount of compensation paid will be taken to have been received under section 40-305 of the ITAA 1997 for the asset, where a right to receive the amount arises as a result of the asset's disposal. In this case, the termination value of the asset would include the amount received or receivable under clause 2(i)iii of the GBRMP SAP 2004 Guidelines.

Capital gains tax

Reimbursement of actual loss on sale of assets

103. The principles set out in paragraphs 67 to 74 apply equally when the reimbursement of the actual loss on the sale of an asset is received.

Reimbursement of accountants costs in preparing the Business Exit Assistance application

104. Any capital gain made on the reimbursement of an amount of reasonable external costs of the applicant's accountant in the preparation of the application for Business Exit (fishery related business) Assistance is reduced under section 118-20 of the ITAA 1997 to the extent that the reimbursement is assessable under Subdivision 20-A of the ITAA 1997.

Reimbursement of statutory redundancy entitlements to employees

105. The principles set out in paragraph 104 apply equally when the reimbursement of statutory redundancy entitlements to employees is received.

Reimbursement of site rehabilitation costs

106. The principles set out in paragraph 104 apply equally when the reimbursement of site rehabilitation costs is received.

Business Advice Assistance

Section 6-5 of the ITAA 1997 - income according to ordinary concepts

107. The costs of seeking business advice prior to making a commitment to apply for either component of the Package would be a deductible expense under section 8-1 of the ITAA 1997. However, the fact that the Business Advice Assistance reimburses the applicant for what may be deductible expenses does not necessarily mean that the Business Advice Assistance is ordinary income. ^[12] It is necessary to examine the relationship between the payment and business activities of the applicant. ^[13]

108. The Business Advice Assistance is made for the purpose of assisting the applicant with the costs of seeking advice to assess the impact of the rezoning on the earning ability of the applicant's business and whether to apply for assistance under the Package. These costs can be accepted as part of the cost of trading operations. The Business Advice Assistance is given for a purpose that is an ordinary incident of part of the applicant's business activities Accordingly, it is considered the Business Advice Assistance is income according to ordinary concepts and is included as assessable income under subsection 6-5(1) of the ITAA 1997.

Capital gains tax

109. Any capital gain made when an amount is paid to the applicant under the Business Advice Assistance component of the Package is reduced under section 118-20 of the ITAA 1997 to the extent that the amount paid is assessable under section 6-5 of the ITAA 1997.

Primary production income

110. Subsection 392-80(2) of the ITAA 1997 provides that a taxpayer's 'assessable primary production income' for the current year is the amount of that taxpayer's basic assessable income for the current year that was derived from, or resulted from their carrying on a primary production business.

111. Under subsection 995-1(1) of the ITAA 1997, a taxpayer carries on a 'primary production business' if they carry on a business of production resulting directly from a number of activities. Paragraph (d) of that definition restricts fishing activities to 'operations relating directly to taking or catching fish, turtles, dugong, bêche-de-mer, crustaceans, oysters or aquatic molluscs. For the purposes of this Ruling, the applicants that are eligible to receive the Business Exit (fishery related business) Assistance, Partial Business Exit (fishery related business) and Business Advice Assistance payments do not carry on a primary production business.

112. The payments received are not classed as 'assessable primary production income for the purposes of calculating the 'averaging' concession available under section 392-80 of the ITAA 1997 because they are not derived from, or resulted from carrying on a primary production business.

Detailed contents list

113. Below is a detailed contents list for this Class Ruling:

Commissioner of Taxation
7 December 2005

References

ATO references:
NO 2005/17126

Related Rulings/Determinations:

CR 2001/1
TR 92/1
TR 92/20
TR 95/35
TR 97/16

Subject References:
assessable recoupment
bounties & subsidies
capital gains tax
capital receipts
government grants income
income
primary production income
termination value

Legislative References:
ITAA 1997 6-5
ITAA 1997 6-5(1)
ITAA 1997 8-1
ITAA 1997 15-10
ITAA 1997 Subdiv 20-A
ITAA 1997 20-25(1)
ITAA 1997 20-25(5)
ITAA 1997 20-30
ITAA 1997 20-30(1)
ITAA 1997 25-50
ITAA 1997 26-55
ITAA 1997 Div 40
ITAA 1997 40-305
ITAA 1997 40-880
ITAA 1997 Pt 3-1
ITAA 1997 104-10
ITAA 1997 104-25
ITAA 1997 104-235
ITAA 1997 Div 110
ITAA 1997 110-45(1B)
ITAA 1997 Div 112
ITAA 1997 Subdiv 115-A
ITAA 1997 Subdiv 115-B
ITAA 1997 Subdiv 115-C
ITAA 1997 116-40
ITAA 1997 118-20
ITAA 1997 118-24
ITAA 1997 Pt 3-3
ITAA 1997 Div 152
ITAA 1997 392-80
ITAA 1997 392-80(2)
ITAA 1997 995-1
ITAA 1997 995-1(1)
ITAA 1936 26(g)
TAA 1953 Pt IVAAA
Copyright Act 1968

Case References:
Allied Mills Industries v. FCT
(1989) 89 ATC 4365

Californian Oil Products Ltd v. FCT (in liq)
(1934) 52 CLR 28
DCT (NSW) v. Meeks
(1915) 19 CLR 568
DCT (Vic) v. Phillips
(1936) 55 CLR 144
Dickenson v. FCT
(1958) 98 CLR 460
FCT v. Rowe;
(1997) 187 CLR 266
35 ATR 432
Federal Coke Co Pty Ltd v. FCT
(1977) 7 ATR 519 at 539
34 FLR 375
First Provincial Building Society Ltd v. Federal Commissioner of Taxation
(1995) 56 FCR 320
95 ATC 4145
(1995) 30 ATR 207
Hayes v. FCT
(1956) 96 CLR 47
Placer Development Ltd v. Commonwealth of Australia
(1969) 121 CLR 353
Reckitt and Colman Pty Ltd v. FC of T
74 ATC 4185
(1974) 4 ATR 501
Scott v. FCT
(1966) 117 CLR 514
SP Investments Pty Ltd v. FCT
(1993) 41 FCR 282
25 ATR 165
Squatting Investments Co Ltd v. Federal Commissioner of Taxation
(1953) 86 CLR 570
10 ATD 126
(1953) 5 AITR 496

Other References:
Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW