Edited version of private ruling

Authorisation Number: 1011539455436

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Ruling

Subject: Landowner agreement

Question 1

Will the annual payments received by you in relation to the landowner agreement (agreement) be included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income?

Answer

Yes.

Question 2

Will the cost of fencing required in year one of the agreement be deductible under section 40-635 of the ITAA 1997?

Answer

No.

Question 3

Will the native vegetation credits constitute a capital gains tax (CGT) asset under section 108-5 of the ITAA 1997?

Answer

Yes.

Question 4

Will CGT event A1 under section 104-10 of the ITAA 1997 happen if you subsequently dispose of any of the native vegetation credits?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You purchased native vegetation rights through a government body.

You signed an agreement with the government body for the management and protection of the native vegetation credit site.

In accordance with the agreement, you were required in year one to erect fencing, and you are responsible for repairing and maintaining all fencing on the property in accordance with the agreement.

You do not use the land to carry on a business.

You have forwarded a copy of the agreement.

Under the agreement, payments can be made each year over a period of X years.

Native vegetation credits will be generated under the agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 40-630

Income Tax Assessment Act 1997 Subsection 40-635(1)

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Paragraph 108-5(1)(a)

Income Tax Assessment Act 1997 Subsection 112-30(3)

Income Tax Assessment Act 1997 Section 118-20

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

Section 6-5 of the ITAA 1997 provides that an amount is included in the assessable income if it is income according to ordinary concepts (ordinary income). Amounts paid in consideration of the performance of services will almost always be income.

The agreement indicates that the payments are paid in consideration of the performance of services, and are the product of the land management services performed by you.

The payments will be included in your assessable income as ordinary income under section 6-5 of the ITAA 1997 in the years that the payments are actually made.

Note

There is no indication in the agreement that any portion of the payments would be of a capital nature, such as for the loss of value of land or for entering into a conservation covenant over the land. We have therefore not been able to determine that any portion of the payments is of a capital nature. If any portion of the payments is determined to be of a capital nature by the government body, then these portions will not be included in your assessable income under section 6-5 of the ITAA 1997.

When you receive an annual payment, CGT event C2 under section 104-25 of the ITAA 1997, relating to cancellation, surrender and similar endings, will happen to a part of your entitlement to receive annual payments.

The capital proceeds from CGT event C2 happening is the amount of the annual payment.

The cost base for the part of the right that ends when an annual payment is made is a proportion of the cost base of your right to receive annual payments worked out under subsection 112-30(3) of the ITAA 1997.

Any capital gain made by you when CGT event C2 happens is reduced (but not below zero) by the amount of the annual payment that is included in your assessable income under section 6-5 of the ITAA 1997 (section 118-20 of the ITAA 1997).

Question 2

Certain capital expenditure incurred in carrying out management actions under the agreement may be deductible as expenditure on a landcare operation for land under section 40-630 of the ITAA 1997 if the land is used for either:

- a primary production business or

- in the case of rural land, carrying on a business for a taxable purpose from the use of that land - except a business of mining or quarrying.

A landcare operation includes erecting a fence on the land primarily and principally for the purpose of excluding animals from an area affected by land degradation:

- to prevent or limit extension or worsening of land degradation in the area and

- to help reclaim the area (subsection 40-635(1) of the ITAA 1997).

You are not using the land to carry on a business separate to the management actions under the agreement. You may, however, be considered to be carrying on a business on entering into the agreement.

Taxation Ruling TR 2006/3, which discusses government payments to industry, states at paragraph 84 that the characteristics of ordinary income have been developed by case law and generally fall into three categories:

1. income from providing personal services

2. income from property or

3. income from carrying on a business.

We have determined above that the payments under the agreement are paid in consideration of the performance of services, and therefore fall into the first of the above categories.

You are not considered to be carrying on a business in relation to the agreement. The management services provided by you in relation to the agreement do not involve the commercial exploitation of skills in a systematic, regular and/or organised manner with a view to obtaining assessable income. Many of the usual indicators of a business are also absent, for example, a business structure, business premises, employees or trading stock.

As you are not using the land for the purposes of carrying on a business, whether in relation to the agreement or otherwise, the cost of the fencing will not be deductible under section 40-630 of the ITAA 1997.

Note

A depreciating asset to which Division 40 of the ITAA 1997 applies is used for the purposes of producing assessable income to the extent it is used to fulfil obligations arising under the agreement. A deduction for the decline in value of the fencing is available provided all other conditions in Division 40 of the ITAA 1997 are also met.

Question 3

Paragraph 108-5(1)(a) of the ITAA 1997 includes as a CGT asset any kind of property.

A native vegetation credit constitutes a CGT asset as defined under paragraph 108-5(1)(a) of the ITAA 1997.

Question 4

CGT event A1 happens on the disposal of a CGT asset. Under section 104-10 of the ITAA 1997, a CGT asset is disposed of when there is a change of ownership, whether because of some act or event or by operation of law.

On the sale of native vegetation credits, you will dispose of a CGT asset at the time you enter into the sale contract. Under subsection 104-10(4) of the ITAA 1997, you will make a capital gain if the capital proceeds from the sale are more than the cost base of the credits. If the capital proceeds are less than the reduced cost base of the credits, you will make a capital loss.

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