Edited version of private ruling

Authorisation Number: 1011617638646

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Ruling

Subject: exceptional circumstances-exit grant

1. Is your $150,000 Exceptional Circumstances Exit Grant (ECEG) assessed as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

2. Is your $150,000 ECEG assessed as a bounty or subsidy under section 15-10 of the ITAA 1997?

No.

3. Is your $150,000 ECEG considered a capital gain and assessable under Division 104 of the ITAA 1997?

Yes.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You have received an ECEG of $150,000 from Centrelink.

The government payment was made as a result of your agreeing to cease business and sell your primary production business.

The payment was conditional that you do not commence a business of primary production within five years of the date on which the payment was made.

Reasons for decision

Income according to ordinary concepts

Subsection 6-5(1) of the ITAA 1997 provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income).

However, as there is no definition of ordinary income in income tax legislation, it is necessary to apply principles developed by the courts to the facts of a particular case.

In accordance with Taxation Ruling TR 2006/3, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient.

A generally decisive consideration is whether the payment is the product in a real sense of any employment, services or business carried on by the recipient. A payment that is provided for a purpose which is not part of the recipients business will not constitute ordinary income.

In your case, the receipt of your ECEG is neither a normal incident of your business nor provided in relation to the purpose for which your business was carried on. The receipt was a direct result of your having sold your business and associated property, and agreeing not to carry on a business of primary production within five years of the payment date.

A compensation receipt generally takes the character of the item it replaces. Accordingly, because an amount received for the disposal of your primary production business and property would be capital in nature, so is the compensation amount paid to you.

It follows that the ECEG does not constitute ordinary assessable income under section 6-5 of the ITAA 1997.

Bounty or subsidy

Section 15-10 of the ITAA 1997 provides that an amount is included in assessable income if it is a bounty or subsidy received in relation to carrying on a business which is not already caught as ordinary income under section 6-5 of the ITAA 1997.

The terms bounty and subsidy are not defined in income tax legislation. The ordinary meaning adopted by case law is an aid provided by the Crown (government) to foster or further some undertaking or industry. It is now well accepted that a subsidy or bounty includes a financial grant made by a government.

In accordance with TR 2006/3, a bounty or subsidy will be in relation to carrying on a business when there is a real connection between the payment and the business. The term in relation includes within its scope payments that have a direct or indirect connection to the business. However, a bounty or subsidy must be related to carrying on the business not merely for commencing or ceasing a business.

Therefore, Government payments to industry received by an entity as assistance either to cease a business or give or sell part of the profit yielding structure of the business are not in relation to the carrying on of the business.

In your case, the receipt of your ECEG is neither a normal incident of your business nor provided in relation to the purpose for which your business was carried on. The receipt was a direct result of your having sold your business and associated property.

Therefore, it is not a bounty or subsidy in relation to the carrying on of a business for the purposes of section 15-10 of the ITAA 1997. Accordingly, no part of the total receipts constitutes assessable income under section 15-10 of the ITAA 1997.

Capital gains tax

CGT event D1 happens under section 104-35 of the ITAA 1997 when a contractual or other legal or equitable right is created in favour of another entity.

A contractual right is created when the taxpayer enters into the agreement with the Commonwealth not to be involved in an agricultural enterprise for at least five years. As the taxpayer agrees not to return to agricultural enterprise for a period of five years, the grant is for entering into a restrictive covenant.

The restrictive covenant is created between the Commonwealth and you only. Although your spouse also signed the declaration, the grant was made to you and it is only you who is required to advise the Commonwealth if you become an owner or operator of an agricultural enterprise again within five years. Further, the amount of the grant is recoverable as a debt to the Commonwealth from you only.

The restrictive covenant is a separate asset from the farming enterprise. It is considered that a CGT event D1 and not A1 is relevant to the restrictive covenant.

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 (subsection 104-35(3) of the ITAA 1997).

The grant received by you is the capital proceeds from the CGT event D1 (section 116-20 of the ITAA 1997). The time of the CGT event D1 is when you enter into the agreement with the Commonwealth.

A capital gain from a CGT event D1 is not a discount capital gain in accordance with subsection 115-25(3) of the ITAA 1997.