Edited version of private ruling

Authorisation Number: 1011560317830

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Ruling

Subject: Tax treatment of payment received

Question 1

Is a payment made by the project to a landowner to assist with on farm works and loss of benefits assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year in which it is received?

Answer: No.

Question 2

Is a payment made by the project to a landowner to assist with on farm works and loss of benefits assessable as a capital gain under Part 3-1 of the ITAA 1997 in the year in which it is received?

Answer: Yes.

This ruling applies for the following period:

1 July 2009 to 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

You owned land for number of years. You had operated a primary production activity on the land but the business activity has ceased.

As a consequence of the project the land is subject to a program.

You were paid an amount in the 2009-10 income year and have purchased some materials.

You have provided a copy of the contract between you and the other parties.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 15-10.

Income Tax Assessment Act 1997 Section 152-1

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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

You have received a lump sum payment as full and final compensation to assist with on farm works and loss of benefit necessitated by the program.

For a compensation payment to be assessable as income under section 6-5 of the ITAA 1997, the payment must be income according to ordinary concepts. The courts have identified a number of factors which indicate whether an amount has the character of income according to ordinary concepts.

A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity, but is not essential for an amount to be income. The proceeds from an isolated transaction outside the ordinary course of business may also be income according to ordinary concepts if the purpose of the transaction is to make a profit or is in the course of the business.

Compensation payments are considered to be income according to ordinary concepts where the payment is compensation for the loss of income or where some portion of the lump sum payment is identifiable and quantifiable as income (Taxation Determination TD 93/58).

In this case, the payment is to compensate for a loss of services and the giving up of the right to make any further claim. The payment was not a trading receipt in the course of the business and does not have a direct connection to any income earning activity conducted on the property.

As you have ceased primary production on the land, the payment is unrelated to any income earning activity. It does not possess the characteristics of income, nor can it be described as being a bounty of subsidy for the purposes of section 15-10 of the ITAA 1997. The element of compensation takes it out of the scope of a bounty or subsidy [Berghofer v. FC of T, 2008 ATC 10-066]. To be assessable as bounties or subsidies under section 15-10 of the ITAA 1997 amounts would need to be '…payments made for the purpose of assisting persons to carry on a business at the time the payments are made' [Squatting Investment Co Ltd v. Commissioner of Taxation (1953) 10 ATD 126; (1953) 26 ALJR 658; (1953) 86 CLR 570].

As you had ceased the primary production activity, the amount received is clearly capital in nature and falls within the negative limbs of section 6 of the ITAA 1997. Therefore it is not considered to be assessable income under ordinary concepts.

Question 2

Your assessable income includes any net capital gain that you made during the income year. A capital gain can only arise if a capital gains tax (CGT) event happens to a CGT asset that you own.

The sum that you received will be a capital gain and may be as a result of one of two CGT events.

CGT event D1

A CGT event D1 happens when you create a contractual right or other legal or equitable right in another entity.

Taxation Ruling TR 95/35 explains how to treat the amount under the capital gains tax provisions is as follows:

Disposal of the right to seek compensation

If the amount of compensation is not received in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. Accordingly, any capital gain arising on the disposal of the right is calculated using the cost base of the right.

The undissected amount may fall into this category because the property in this instance is not the relevant asset as it was neither permanently damaged nor was its value permanently reduced.

CGT event C2

Your entitlement is a contractual right that is a separate CGT asset under subsection 108-5(1) of the ITAA 1997.

The undissected amount may fall into this category as the original supply will cease and the supply will be reinstated.

We are not able to determine which CGT event will occur due to lack of documentation, however a CGT event will occur in the 2009-10 income year and the gain will need to be included as income in that year.

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