Edited version of private advice

Authorisation Number: 1051724516311

Date of advice: 21 August 2020

Ruling

Subject: Water infrastructure payment - non-assessable non-exempt income

Question 1

Is the payment received from X under the Deed assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the payment received under the Deed assessable under Subdivision 20-A of the ITAA 1997?

Answer

No.

Question 3

Is any capital gain you made as a result of receiving the payment under the Deed assessable under section 102-5 of the ITAA 1997?

Answer

No.

Question 4

Are you entitled to a deduction for expenditure you will incur as a result of executing the Deed?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You own a rural property (the property).

You executed a Deed to rationalise the provision of water to the property.

You executed a Supplementary Deed which is intended to form part of the agreement between the parties.

You received a payment under the terms of the Deed.

You agreed at your cost to carry out all works required by the Deed. This includes the cost of depreciating assets and capital works.

You will make the choice prescribed by section 59-65 of the ITAA 1997 in the approved form.

The program you received the payment under is in the published list of Sustainable Rural Water Use and Infrastructure Program (SRWUIP) programs as prescribed by section 59-70 of the ITAA 1997 at all relevant times.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Subdivision 20-A

Income Tax Assessment Act 1997 section 26-100

Income Tax Assessment Act 1997 section 40-222

Income Tax Assessment Act 1997 paragraph 43-70(2)(i)

Income Tax Assessment Act 1997 section 59-65

Income Tax Assessment Act 1997 section 59-67

Income Tax Assessment Act 1997 section 59-70

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 subsection 110-38(8)

Income Tax Assessment Act 1997 subsection 110-55(9G)

Income Tax Assessment Act 1997 paragraph 118-37(1)(ga)

Income Tax Assessment Act 1997 paragraph 118-37(1)(gb)

Reasons for decision

Your assessable income includes income according to ordinary concepts, which is called ordinary income (section 6-5 of the ITAA 1997).

Amounts that are not ordinary income but are included in your assessable income by another provision are called statutory income (section 6-10 of the ITAA 1997).

The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Included in this list are Subdivision 20-A (recoupment) and section 102-5 (capital gains).

However, if an amount is non-assessable non-exempt income it is not assessable income (subsection 6-15(3) of the ITAA 1997).

An amount of ordinary income or statutory income is non-assessable non-exempt income if a provision of this Act or another Commonwealth law states that it is not assessable income and is not exempt income (section 6-23 of the ITAA 1997).

A summary list of provisions about non-assessable non-exempt income can be found in Subdivision 11-B of the ITAA 1997. Included in this list is section 59-65 of the ITAA 1997 which is about water infrastructure improvement payments.

A SRWUIP payment, in respect of a SRWUIP program, to an entity that is a participant in the program is not assessable income and is not exempt income if the entity has made a choice under subsection 59-65(2) of the ITAA 1997 for the program, and if the payment is an indirect SRWUIP payment - the entity derives the payment because it owns an asset (otherwise than under a financial arrangement) to which the program relates (subsection 59-65(1) of the ITAA 1997).

One of the requirements for a SRWUIP payment is for the SRWUIP program to be on the published list of SRWUIP programs for the day the payment is made (see subsection 59-67(5) of the ITAA 1997) (note to subsection 59-65(1) of the ITAA 1997).

A SRWUIP program is a program under the program administered by the Commonwealth known as the Sustainable Rural Water Use and Infrastructure program (subsection 59-67(1) of the ITAA 1997).

A SRWUIP payment, in respect of a SRWUIP program, is a direct SRWUIP payment in respect of the program or an indirect SRWUIP payment in respect of the program (subsection 59-67(2) of the ITAA 1997).

A direct SRWUIP payment is a payment by the Commonwealth to a participant in a SRWUIP program to the extent that it is made under that program (subsection 59-67(3) of the ITAA 1997).

An indirect SRWUIP payment is a payment to a participant in a SRWUIP program to the extent that it is reasonably attributable to a payment by the Commonwealth under that program (subsection 59-67(4) of the ITAA 1997).

For the purposes of subsections 59-67(3) and 59-67(4) of the ITAA 1997, treat a payment as being made under a SRWUIP program only if that SRWUIP program is on the published list of SRWUIP programs (see section 59-70 of the ITAA 1997) for the day the payment is made (subsection

59-67(5) of the ITAA 1997).

Where a valid choice is made under subsection 59-65(2) of the ITAA 1997 to make a SRWUIP payment non-assessable non-exempt income the following will also occur:

• any capital gain or loss arising from a CGT event (whether from the transfer of a water right or otherwise) is disregarded (see paragraphs 118-37(1)(ga) and (gb) of the ITAA 1997)
• deductions for expenditure required under the SRWUIP program are foregone (see section 26-100 of the ITAA 1997)
• expenditure on CGT assets that is attributable to a SRWUIP payment is excluded from the cost base or reduced cost base of those CGT assets (see subsection 110-38(8) and subsection 110-55(9G) of the ITAA 1997)
• expenditure required under the SRWUIP program for the cost of any depreciating asset is excluded from the cost of those depreciating assets (see section 40-222, subsection 40-515(3) and section 40-540 of the ITAA 1997), and
• expenditure required under the SRWUIP program for the cost of constructing any capital works is not construction expenditure (see section 43-70(2) of the ITAA 1997), such that capital works deductions cannot be claimed for those capital works.

Application to your circumstances

The payment you received under the Deed is an indirect SRWUIP payment in respect of a SRWUIP program. You will make a choice to make the SRWUIP payment non-assessable non-exempt income. As a result of you making this choice:

·         the SRWUIP payment is not included in your assessable income

·         any capital gain or loss made as a result of the payment is disregarded

·         deductions for expenditure required under the SRWUIP program are foregone

·         expenditure on CGT assets that is attributable to the SRWUIP payment is excluded from the cost base or reduced cost base of those CGT assets

·         expenditure required under the SRWUIP program for the cost of any depreciating asset is excluded from the cost of those depreciating assets, and

·         expenditure required under the SRWUIP program for the cost of constructing any capital works is not construction expenditure such that capital works deductions cannot be claimed for those capital works.

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