Edited version of private ruling

Authorisation Number: 1011774350265

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Ruling

Subject: Income or Capital - exceptional circumstances exit grant.

Questions

1. Is the grant considered a capital receipt?

Answer: Yes.

2. Did CGT event D1 under section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997) happen upon entering into the agreement to receive the grant?

Answer: Yes.

3. Does the grant relate to the disposal of an asset acquired prior to 19 September 1985, and as such any capital gain would be disregarded?

Answer: No.

This ruling applies for the following period

1 July 2008 to 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

You began as a fulltime self employed farmer before September 1985 and farmed continuously until you married. You then traded as a partnership which continuously operated a farming business until you accepted an exit grant offered by the government.

You entered into an agreement and received an exit grant from the Government and received payment in the 20XX-XX income year.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 section 15-10
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 104-35
Income Tax Assessment Act 1997 subsection 115-25

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise specified.

In return for receiving the grant, you have amongst other things, agreed not to be engaged in a primary production business for the following five years. Although it was a condition of your grant that you disposed of your farming business, the grant itself is not considered to be in respect of the sale of the business or the underlying land.

The grant itself is considered to be a capital receipt as it was not received in the ordinary course of your business, nor does it have any of the other hallmarks associated with ordinary income such that it would be normally assessable under section 6-5 (or section 15-10).

Pre-CGT

The receipt of the grant was not for the disposal of the business or the underlying land. Instead, you entered into a restrictive covenant, in that you agreed not to engage in another primary production business for five years after entering into the agreement with the Government.

As the grant is not in respect to the disposal of any of the assets that you acquired prior to 19 September 1985, any resulting capital gain (or loss) cannot be disregarded under subsection 104-10(5).

CGT event D1

CGT event D1 under section 104-35 happens if you create contractual or other rights in another entity.

Subsection 104-35(2) provides that the timing of the event is when you enter into the contract or create the right.

Finally, subsection 104-35(3) states that a capital gain is made if the capital proceeds from creating the right exceed the incidental costs incurred in creating that right.

In your case, you have created contractual rights in the Federal Government in that you have agreed not to engage in a primary production business for five years. As such, CGT event D1 is considered to have happened at the time you entered into this agreement with Centrelink.

You will make a capital gain if the capital proceeds exceed any incidental costs that you may have incurred. An example of an incidental cost may be legal fees paid to a solicitor to explain to you your obligations under the agreement prior to signing it.

Under Division 115, a capital gain can be reduced by 50% if the underlying asset was owned for at least 12 months. In order to apply the 50% discount, the capital gain must be what is referred to as a 'discount capital gain'.

Subsection 115-25(3) specifically states that CGT event D1 cannot give rise to a discount capital gain. This follows from the fact that you would have received the capital proceeds shortly after creating the contractual rights.

As such, you cannot apply the 50% discount to any capital gain arising from the CGT event.

Summary

· The receipt of the grant is considered a capital receipt

· CGT event D1 happens in respect of the grant

· The 50% discount is not available.

· Any resulting gain cannot be disregarded as it does not relate to the disposal of a pre-CGT asset.