Edited version of private ruling

Authorisation Number: 1011842743727

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Ruling

Subject: Exceptional circumstances exit grant and CGT small business relief

Question 1

Does a D1 capital gains tax (CGT) event under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happen in relation to the restrictive covenant upon receipt of the Exceptional Circumstances Exit Grant (ECEG)?

Answer

Yes.

Question 2

For the purposes of section 152-12 of the ITAA 1997 and the basic conditions for accessing the small business CGT relief provisions, was the right created in relation to the restrictive covenant 'inherently connected' with your interest in the goodwill of the business?

Answer

Yes, provided the goodwill of the business satisfied the active asset meaning and test.

This ruling applies for the following period:

Year ended 30 June 2010

Relevant facts and circumstances

The ECEG is an Australian Government package that is administered on the government's behalf by Centrelink. It is payable to farmers who's farm enterprise is located in an Exceptional Circumstances drought declared area and, having met certain eligibility criteria, sell their farming enterprise and undertake not to become an owner or operator of a farming enterprise again within a period of five years. The Exit Grant is for an amount of up to $150,000, subject to an assets test.

Subsequent to applying for the funding you sold your business in satisfaction of the ECEG requirements. You had operated it for at least 15 years.

In the year ended 30 June 2010 you applied for and received a payment under this scheme.

You state that you are over 55 years old.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-10

Income Tax Assessment Act 1997, section 104-35

Income Tax Assessment Act 1997, subsection 104-35(2)

Income Tax Assessment Act 1997, section 108-5

Income Tax Assessment Act 1997, subsection 115-25(3)

Income Tax Assessment Act 1997, section 152-105

Income Tax Assessment Act 1997, paragraph 152-105(a)

Income Tax Assessment Act 1997, section 152-10

Income Tax Assessment Act 1997, paragraph 152-10(1)(a)

Income Tax Assessment Act 1997, paragraph 152-10(1)(d)

Income Tax Assessment Act 1997, section 152-12

Income Tax Assessment Act 1997, section 152-35

Income Tax Assessment Act 1997, paragraph 152-40

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 of the ITAA 1936, 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

Note: Unless otherwise stated, all subsequent legislative references are to the ITAA 1997.

Question 1

CGT event A1 happens under section 104-10 if you dispose of a CGT asset by affecting a change of ownership from you to another entity, whether because of some act or event or by operation of law.'

CGT event D1 happens under section 104-35 when a contractual or other legal or equitable right is created in favour of another entity.

The Commonwealth is an entity for the purpose of CGT event D1.

Application to your circumstance

An A1 CGT event happened when the farming enterprise and assets were sold prior to your having lodged the application for the ECEG. The facts of your case do not support the conclusion that another A1 CGT event happened in relation to the receipt of the ECEG.

A contractual right was created when you entered into an agreement with the Commonwealth to abide by the condition of a restrictive covenant which precludes you from owning or operating an agricultural enterprise for at least five years.

Whilst the disposal of your farm satisfied a qualification requirement in relation to your eligibility to apply for the ECEG, it remains that the funding was paid in relation to the right (restrictive covenant) which is a separate CGT asset which was created upon the signing of the agreement. It follows that the appropriate CGT event is D1.

Under subsection 104-35(2) you will make a capital gain if the capital proceeds from creating the restrictive covenant are more than the incidental costs you incurred in relation to it. You will make a capital loss if the capital proceeds are less than the incidental costs you incurred in relation to it.

Question 2

The small business 15 year exemption is addressed in Subdivision 152-B. In relation to individuals, section 152-105 provides that a capital gain arising from a CGT event may be disregarded provided certain conditions are satisfied. You indicate in your application that you would like us to address the paragraph 152-105(a) condition which directs us to the basic conditions under Subdivision 152-A, and in particular the active asset test.

The basic conditions for relief are contained in section 152-10. Paragraph 152-10(1)(d) outlines the requirement that the active asset test under section 152-35 must be met. However, a note attached to this paragraph provides that the active asset test does not apply in the case of CGT event D1. It refers us to section 152-12 which applies in place of both paragraphs 152-10(1)(a) and 152-10(1)(d).

Subsection 152-12(2) provides the 'basic condition that the right you create that triggers the CGT event must be inherently connected with a CGT asset of yours that satisfies the active asset test.'

Application to your circumstance

In your case, we consider that the right created in relation to the restrictive covenant which triggered the D1 CGT event will be 'inherently connected' to the goodwill of the business (provided of course that the goodwill satisfied the active asset meaning and test as required in terms of sections 152-40 and 152-35 respectively).

That is, provided the goodwill was an active asset then the requirements under section 152-12 will have been satisfied.

You state that the other conditions in section 152-105 are all satisfied. Providing the remaining basic conditions in Subdivision 152-A are met you will be entitled to access the Subdivision 152-B small business 15-year retirement exemption in relation to the restrictive covenant and the receipt of the ECEG.

Further issues for you to consider

CGT discount

A capital gain from a CGT event D1 is not a discount capital gain in accordance with subsection 115-25(3).

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