Edited version of private ruling

Authorisation Number: 1011884209082

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Ruling

Subject: Native Vegetation Agreement - income or capital

Question 1:

Will the annual payments received by you in relation to the agreement be included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes.

Question 2:

Will the annual payments received by you in relation to the agreement be considered for inclusion in your assessable income under the capital gains tax (CGT) provisions?

Answer: Yes, however, the amount to be included under the CGT provisions will be reduced to nil under section 118-20 of the ITAA 1997 as the amount has already been included under 6-5 of the ITAA 1997.

This ruling applies for the following periods:

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.
1 July 2014 to 30 June 2015.
1 July 2015 to 30 June 2016.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

You own some land.

The state government established a program to help improve the quality and extent of native vegetation in the state.

The program assists in generating and sourcing native vegetation. The program aims to achieve a gain in the quality and/or quantity of native vegetation that is subject to a secure and ongoing agreement.

You have entered into an agreement. Under the agreement you will receive annual payments.

You are required to meet certain standards and carry out certain actions to receive the annual payments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Subsection 6-5(1)
Income Tax Assessment Act 1997 Subsection 112-30(3)
Income Tax Assessment Act 1997 Section 118-20

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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, 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

Section 6-5 of the ITAA 1997 - 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 each case.

Whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1, the Full High Court stated:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

In MIM Holdings Ltd v. Commissioner of Taxation 97 ATC 4420; (1997) 36 ATR 108, Northrop, Hill and Cooper JJ, relying on Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 11 ATD 68 and Reuter v. FC of T 93 ATC 4037; (1993) 24 ATR 527 said that 'amounts paid in consideration of the performance of services will almost always be income'.

The question of whether an amount is a product of the taxpayer's services (that is, paid in consideration of the performance of the taxpayer's services) has been considered in a number of High Court decisions. The following guidance is afforded by those decisions:

· the whole of the circumstances must be considered

· a generally decisive consideration is whether the receipt is the product in a real sense of any employment of, or services rendered by the recipient, or of any business, or any revenue production activity carried on by the recipient

· other considerations that are relevant but not decisive include:

· the motive of the donor (payer) in paying the amount

· the regularity and periodicity of the payment, however a payment in a lump sum does not require a conclusion that the payment is capital, and

· the recipient's expectation that an amount will be received.

The agreement specifies the rights and obligations of both the landowner and other parties. It includes a schedule of management actions the landowner needs to complete to receive payment.

The annual management payment is the product of the land management services performed by the landowner.

Other factors such as the landowner's expectation to receive payment in return for undertaking the activities as set out in the agreement and the purpose of the payment also support the conclusion that the ongoing management payments are the product of the services rendered. The fact that the payments are made in an annual lump sum does not alter this conclusion.

Thus, annual payments received by you constitute ordinary income and are included in your assessable income in the year in which it is received under section 6-5 of the ITAA 1997.

CGT provisions

When you receive an annual payment, CGT event C2 under section 104-25 of the ITAA 1997, relating to cancellation, surrender and similar endings, will happen to a part of your entitlement to receive annual payments.

The capital proceeds from CGT event C2 happening is the amount of the annual payment.

The cost base for the part of the right that ends when an annual payment is made is a proportion of the cost base of your right to receive annual payments worked out under subsection 112-30(3) of the ITAA 1997.

Any capital gain made by you when CGT event C2 happens is reduced (but not below zero) by the amount of the annual payment that is included in your assessable income under section 6-5 of the ITAA 1997 (section 118-20 of the ITAA 1997).

In your case, as the amounts are considered assessable as ordinary income under section 6-5 of the ITAA 1997, any capital gain arising from CGT event C2 will be reduced to nil.