Edited version of private ruling

Authorisation Number: 1011503632754

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Ruling

1. Is the funding received under a government environment management plan primary production income?

No.

2. Is the first instalment payment assessable in the 2009-10 income year?

No.

This ruling applies for the following periods

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

The scheme commenced on

1 July 2009

Relevant facts

Your partnership is conducting a primary production business.

Your partnership has successfully applied for environmental stewardship funding from the federal Government. The funding is covered by a head funding deed of agreement, with an expiry date. The funding is to be paid in a number of instalments, with the first instalment received prior to 30 June 2010.

The payment of the instalments under the funding deed of agreement is dependant on:

· the partnership having performed the relevant milestone of the project to which each instalment relates to, and

· the partnership having notified the Commonwealth of the successful completion of the relevant milestone, and the Commonwealth being satisfied that the milestone has been adequately completed, and

· there are sufficient funds remaining under the program for the instalment/s to be made.

If the Partnership does not meet the required milestones for each stage of the funding, the Commonwealth may demand the repayment of that funding amount. The partnership has not yet begun undertaking the activities necessary to retain the initial instalment.

Further, under the deed of agreement, the partnership cannot obtain funding from another source for its activities in relation to the program, and cannot enter into any other arrangement or agreement that is inconsistent with the partnership's obligations under the program.

The deed of agreement does not pass any land title ownership to the Commonwealth. The Agreement covers part of the property. Under the Agreement, the partnership can use the affected land at certain times of the year. Other requirements under the Deed of Agreement include:

· retaining of all standing timber and rocks

· retaining all fallen timber

· avoiding fertiliser use

· minimise soil disturbance

· remove or control weed occurrences, with restrictions on the use of herbicides

· allow for sufficient regeneration by minimising use.

Your partnership is not disposing of any of its land titles to the Commonwealth under the deed of agreement. Further, the agreement does not restrict the partnership's abilities to dispose of any part of the land covered by the program. Where the land is disposed of before the end of the program, it is the Commonwealth's decision as to whether it enters into an agreement under the program with the new owner of the land.

Reasons for decision

Question 1

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you carry on a primary production business if (amongst other things) you carry on a business of maintaining animals for the purpose of selling them or their bodily produce (including natural increase).

Subsection 392-80(2) of the ITAA 1997 defines 'assessable primary production income' as your basic assessable income that was derived from, or resulted from, your carrying on a primary production business.

You have operated a primary production business for some years. Any income you receive from your business is considered primary production income.

The ITAA 1997 does not provide guidance on when an amount is derived from a primary production business. However, the Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No.2) 1978, which first used the words 'assessable primary production income' in the corresponding provision in the Income Tax Assessment Act 1936, does provide some guidance on the scope of its meaning and the type of income to be taken into account. In explaining that the amendments were specifically intended to limit the benefits of averaging to income from primary production, it stated that the system is to be varied so as to more strictly confine averaging benefits to income derived from primary production.

Taxation Ruling TR 2006/3, paragraph 124, states that assessable government payments to industry that result from carrying on a primary production business is primary production income.

In Class Ruling CR 2008/40 the reimbursement of the cost of obtaining financial advice prior to deciding whether to accept an offer of assistance is given for a purpose that is part of the recipient taxpayer's normal business operations and therefore assessable income under subsection 6-5(1). In addressing the primary production income issue of this reimbursement, paragraphs 102 to 104 of CR 2008/40 state;

· In order for income to be derived from, or result from, carrying on a primary production business, there must be a causal connection between the income received and the primary producer's trade or business.

· Where a payment is made whilst a business or trading activity continues, and no decision has been taken to cease business, there is the necessary causal connection between the income received and the primary producer's trade or business.

· Accordingly, the reimbursement of expenses for advice sought prior to deciding whether to apply for the licence surrender package is 'assessable primary production income' under subsection 392-80(2).

Taxation Determination TD 2008/16 considers that exceptional circumstances relief payments (ECRP) paid to a farmer under the Farm Household Support Act 1992 are not 'assessable primary production income' as it is not income that is derived from or results from, carrying on a primary production business. Paragraph 19 states 'assessable primary production income' is used to confine the application of averaging to income from farm sources and income that does not have a farm source is excluded. Paragraph 22 states the source of the ECRP is the government, is not intended to replace primary production income and does not have a farm source.

The Lower Murrumbidgee Eco Tender program, as described in Class Ruling CR 2010/1, explain that the payments made in this program are made for a conservation management service and is income according to ordinary concepts and assessable under section 6-5 of the ITAA 1997. This conservation program is similar to your environment management plan.

In your circumstances, the funding offered under the environment management plan is to improve the condition and extent of the ecological area on your property and requires you to carry out a range of management activities in accordance with the program. The government funding is paid to you for services rendered in undertaking environmental management activities.

The funds for the program have not been derived from, or result from, carrying on a primary production business. These payments do not have the necessary causal connection to your primary production business to be categorised as primary production income. The funding is therefore not assessable primary production income under subsection 392-80(2) of the ITAA 1997.

Question 2

Section 6-5 of the ITAA 1997 states your assessable income includes income according to ordinary concepts.

Taxation Ruling TR 2006/3 paragraph 23 discusses conditional grants and states government payments to a business are sometimes provided on terms where the recipient must meet agreed conditions within a specified period. The payments become unconditional when the recipient satisfies the required conditions of the agreement with the funding authority. It is at this time that the payment is taken to be received, not at the time the payment was paid.

Paragraph 24 of TR 2006/3 states advance payments as being derived when the recipient has done everything necessary to be entitled to retain the amount received.

In your case, when you received the first instalment in the 2009-10 income year you received the payment with the stipulation of the agreement that you must meet agreed conditions within a specified period. If the conditions are not met you may be required to repay the payment amount. Therefore, the payment received in the 2009-10 income year will not be derived until you satisfy the required conditions of the agreement with the funding authority. Consequently, as the required conditions of the agreement have not been met in the 2009-10 income year, the payment is not included in your assessable income under section 6-5 of the ITAA 1997 in the 2009-10 income year.