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Edited version of private ruling
Authorisation Number: 1011657090437
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Ruling
Subject: Payments received - disposal of a right - capital account or ordinary income
Are the payments received by you for the disposal of the right considered to be a capital gains tax (CGT) event and as such treated on capital account rather than ordinary income?
No.
This ruling applies for the following periods:
1 July 2007 to 30 June 2008.
1 July 2008 to 30 June 2009.
1 July 2009 to 30 June 2010.
The scheme commences on:
1 July.
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
The trustee for the trust signed a franchisee agreement and commenced trading.
The business received income based on a commission.
A company entered negotiations to purchase the company holding the franchisee agreements and support functions.
The purchasing company wrote to all franchisees outlining the proposal that franchisees surrender their right to ongoing commission in lieu of receiving payment.
The deed confirming your agreement to the proposal was signed and subsequently sent to the purchaser.
As a result of entering in to the agreement the trust lost all right to future income for products entered into prior to a certain date.
The trust received a sum of money over a period.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Division 108.
Income Tax Assessment Act 1997 Section 108-5.
Income Tax Assessment Act 1997 Section 118-20.
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
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.
A capital gain or capital loss may be made if a CGT event happens to a CGT asset. Division 108 of the Income Tax Assessment Act 1997 (ITAA 1997) refers to CGT assets. Section 108-5 of the ITAA 1997 describes a CGT asset as any kind of property or legal or equitable right that is not property.
Your right to future commissions is a CGT asset and the disposal of your right to future commissions will be a CGT event A1. A CGT event A1 happens if you dispose of a CGT asset and the time of the event is when you enter into the contract for the disposal. You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base.
Whilst the payments received by you for the disposal of the right to future commissions may have been assessable under the CGT provisions, the anti overlap provisions contained in section 118-20 of the ITAA 1997 reduce any capital gain to zero to prevent the taxing of the same amount twice. The amount is otherwise assessable under another provision, section 6-5 of the ITAA 1997.
The anti overlap provisions provide that the payments (or the capital gain) can not be treated on capital account rather than income. Rather, the capital gain is reduced to nil if another provision of the Act includes the amount (the payment) in your assessable income.
In your case, the payments have been found to be ordinary income and assessable under section 6-5 of the ITAA 1997. The payments will be included in your income tax return for the year in which they are received. Therefore, even though a CGT event A1 will happen to a CGT asset, any capital gain will be reduced to nil.