Edited version of private ruling

Authorisation Number: 1011723033220

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Ruling

Subject: Capital gains tax

Question 1

Are the amounts received by the taxpayer pursuant to the Deed dated the particular month 200X on capital account being the proceeds from the disposal of a CGT asset?

Answer: Yes.

Question 2

On the basis the amounts received are capital proceeds in relation to the disposal of a CGT asset, is the capital gain eligible for the 50% capital gains tax discount?

Answer: Yes. When held for 12 months.

Question 3

On the basis the amounts received are capital proceeds in relation to the disposal of a CGT asset, is the asset disposed of an active asset for the purposes of the small business CGT concessions?

Answer: Yes.

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 business signed franchisee agreements with a home loan lender (HLL) and commenced trading some years ago.

The business received income from HLL based on a commission model of solely trail income calculated from:

In XXX the commission structure was changed by the HLL to reflect an amount upfront & a reduced trail amount for transactions.

In XXX a banking organization (BO) entered negotiations to purchase the HLL, the company holding the Franchisee Agreements and back office support functions. The purchase agreement did not include any of the loan book held by the HLL.

The purchase price of $XXX included a sum to be paid to Franchisees as compensation for the trail income on the loan book that would remain with HLL.

BO wrote to all Franchisees outlining the proposal that HLL Franchisees surrender their right to ongoing trail commission in lieu of receiving payment from the BO owned entity.

On XXX the Deed confirming the client's agreement to the proposal was signed and subsequently sent to the BO.

The sale of HLL to BO became effective on the XXX and on this date BO / HLL Financial Group Ltd provided a "Deed of Compensation of Trail Payments" to the taxpayer to formalise the new payment (Schedule B). The communication included an excel spreadsheet that calculated the exact payments over a five year period.

In XXX a large number of the Franchisees entered in to a dispute with the Franchisor about the new payment structure/previous income streams and this Franchisee did not sign the Deed supplied to them.

In an effort to resolve the dispute BO/HLL entered in to negotiations and agreed to a new payment schedule for the agreed amount which meant that income would be received over a shorter period with two lump sums that would be used to reduce/payout the TBS debt. Additionally Franchisees would receive a $XXX payment to be used for Local Area Marketing OR a $XXX payment to be used to partly fund the acquisition of a HLL branded motor vehicle. The Trust did not agree to these new terms and remained in dispute.

This amendment to the original offer/Deed was available to all Franchisee irrespective of whether they were a party to the dispute or not.

After continuing negotiations, the Taxpayer which allowed for the XX monthly payments as stipulated in the deed. By signing the above Deed of Settlement, BO/HLL Financial Group agreed to pay $XXX for outstanding commissions withheld during the dispute and a further sum of $XXX to reimburse interest charged on the XX debt which had been charged during the period in dispute. These amounts were used to offset against the outstanding XX debt. The remaining XX debt was then repayable in XX equal instalments.

Additional payments to the value of $XXX were also made available as part of the Deed of Settlement to offset future business costs such as advertising, marketing, and recruitment agency fees.

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.

All legislative references referred to herein are from the Income Tax Assessment Act 1997 (ITAA 1997).

A capital gain or capital loss may be made if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset). Division 108 refers to CGT assets. Section 108-5 describes a CGT asset as any kind of property or legal or equitable right that is not property.

The right to future trail commissions is a CGT asset and its disposal constitutes a CGT event A1. Section 104-10 outlines CGT event A1. A CGT event A1 happens if you dispose of a CGT asset and the time of the event is when you event is when you enter into the contract for the disposal or if there is no contract - when change of ownership occurs. You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

In conducting your business, you held an interest in a franchise, an interest in future trail commissions and clients (collectively referred to as "business assets") used in your business. You disposed of future trail commissions and old clients and this disposal resulted in a CGT event A1.

You disposed of the whole client base of the business, not just a part of it and so the receipt is considered on capital account rather than revenue account.

Your settlement deed is dated the particular month 200X, which is the date of disposal of your asset and the time of the CGT event. The capital proceeds that you receive for the sale/forfeiture of your trail commissions will be accounted for in the income year of 200X when the disposal occurs, that is 200X financial year.

Question 2

On the basis the amounts received are capital proceeds in relation to the disposal of a CGT asset, is the capital gain eligible for the 50% Capital Gains Tax discount?

Summary:

The capital gain is eligible for the 50% CGT discount:

The taxpayer is a trust (section 115-10)

There is a CGT event (section 115-15)

There is no reference to indexation of the cost base in calculating the gain (section 115-20)

The CGT asset (right) was acquired at the time the franchise agreement was entered into some years ago and therefore the CGT asset has been owned for more than 12 months (section 115-25)

Detailed reasoning:

To be a discount capital gain, a capital gain must

(a) be made by an individual, a complying superannuation entity or a trust (section115-10 of the ITAA 97);

(b) result from a CGT event happening after 11.45am EST on 21 September 1999 (section115-15 of the ITAA 97);

(c) be worked out without the cost base being indexed (section 115-20 ITAA 97)

(d) result from a CGT event happening to a CGT asset owned by the taxpayer for at least12 months (section115-25 ITAA of the 97).

In regards to the above conditions:

(a) You are a trust. Therefore, this condition is satisfied.

(b) A CGT event A1, which resulted in the capital gain, happened in the particular month 200X. As the CGT event happened after 11.45am EST on 21 September 1999 this condition is satisfied.

(c) If the cost was worked out without reference to indexation this condition is satisfied.

(d) Your settlement deed is dated the particular month 200X, which is the date of disposal of your asset and the time of the CGT event. If this occurred at least 12 months after the asset (the right to future trail commissions) was acquired this condition is satisfied.

Note: The receipt of an amount in satisfaction of this right within 12 months of the date of acquisition of the right would not qualify as a discount capital gain.

Question 3

On the basis the amounts received are capital proceeds in relation to the disposal of a CGT asset, is the asset disposed off an active asset for the purposes of the Small Business CGT concessions?

Summary:

The CGT asset (the right to future trail commissions) is an active asset as it is an intangible asset inherently connected with your business.

Detailed reasoning:

Section 152-40 defines an active asset and subsection 152-40(1) states, in part, the following:

(1) A CGT asset is an active asset at a time if, at that time:

(a) you own the asset ... and:

(i) you, use it, or hold it ready for use, in the course of carrying on a business; or

(ii) it is used, or held ready for use, in the course of carrying on a business by your affiliate, or by another entity that is connected with you

(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

The CGT asset (the right to future trail commissions) is an intangible asset that is inherently connected with the franchise business carried on by the taxpayer. Therefore as it satisfies the conditions in paragraph 152-40(1)(b) it is an active asset.

Note: For an active asset to qualify for the CGT small business concessions it must pass the active asset test in section 152-35.