Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012340078780

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Capital gains tax

Question 1

Did a capital gains tax (CGT) event occur when you received the exit grant?

Answer

Yes.

Question 2

Do you satisfy the basic conditions for the small business CGT concessions?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You purchased a property.

The property was used solely to run a business during the ownership period.

You sold your property due to financial stress and being unable to meet all your debts.

You were deemed eligible, and received, an exit grant.

In order to be eligible for the grant, you were required to agree to not become an owner or operator of an enterprise within five years of exiting the industry.

You are a small business entity.

You satisfy the maximum net asset value test.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10,

Income Tax Assessment Act 1997 section 104-35,

Income Tax Assessment Act 1997 section 152-10,

Income Tax Assessment Act 1997 section 152-35, and

Income Tax Assessment Act 1997 section 152-40.

Reasons for decision

Note: Unless otherwise stated, all subsequent legislative references are to the Income Tax Assessment Act 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.

Taxation Ruling TR 1999/16 addresses capital gains and the goodwill of a business. At paragraph 33 it provides that a restrictive covenant is inextricably linked to the value of any goodwill disposed of. If during the disposal of a business a specific part of the sale proceeds is not allocated to the covenant, then for the purposes of Part 3-1 we will treat the giving of the covenant as being ancillary to the disposal of the goodwill of the business and no part of the proceeds will be attributed to the grant of the restrictive covenant.

Application to your circumstance

As you entered into the agreement and owned the property in your own right, as a sole trader, the grant represents capital proceeds for both the sale of the farm assets and the agreement not to commence another farming enterprise for five years.

However, in accordance with the direction provided in paragraph 33 of TR 1999/16, we have determined that because no identifiable part of the grant was paid specifically in relation to the restrictive covenant it is reasonable to allocate the entire exit grant to the sale of the farm assets.

Given that the relevant CGT event in relation to the sale of those assets is A1 it follows that the appropriate CGT event pertaining to the receipt of the grant is also A1.

The grant should be apportioned across the assets on a reasonable basis. The relative market values of the assets at the time of their sale would generally represent a reasonable basis upon which to apportion the capital proceeds from the grant.

Question 2

Small business CGT concessions

There are four capital gains tax (CGT) small business concessions that apply after 11.45am on 21 September 1999 which are:

Before considering any of these concessions, there are certain basic conditions which must be satisfied. Section 152-10 outlines the basic conditions for relief where a capital gain may be reduced or disregarded. These conditions are as follows:

In your case, as discussed above, a CGT event occurred when you sold your farming property. The disposal of this asset resulted in a capital gain. The aggregated turnover of your business is under $2 million (you are a small business entity) and the value of you and your affiliates assets is less than $6 million (you satisfy the maximum net asset value test).

The active asset test

This test requires the CGT asset to be an active asset for:

An active asset may be a tangible asset or an intangible asset.

A tangible or intangible asset is a CGT active asset if it is used or held ready for use in the course of carrying on a business by:

In your case, you purchased property. This property has been used in the course of carrying on your business up until it was sold. The asset has been used in carrying on your business for the entire ownership period. Therefore, it will satisfy the active asset test.

Conclusion

The basic conditions in section 152-10 have been satisfied. Therefore, you are eligible for the small business capital gains tax concessions.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).