Edited version of private ruling

Authorisation Number: 1011885272790

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Ruling

Subject: Assessability of an exceptional circumstances exit grant - split between husband and wife?

Question 1

Did the signing of a contract with the Commonwealth under which a restrictive covenant was entered into in return for an entitlement to funding by way of an Exceptional Circumstances Exit Grant (ECEG) constitute a D1 capital gains tax (CGT) event under section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the capital proceeds from the funding be split on a 50/50 basis between both the husband and the wife?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Relevant facts and circumstances

The husband and the wife acquired a farm post CGT in partnership. Contracts for sale were signed and settlement took place in the year ended 30 June 2011. Upon disposal they incurred a capital loss.

The ECEG is an Australian Government package that is administered on the government's behalf by Centrelink. It is payable to farmers whose farm enterprise is located in an Exceptional Circumstances drought declared area and, having met certain eligibility criteria, sell their farming enterprise and undertake not to become an owner or operator of a farming enterprise again within a period of five years. The Exit Grant is for an amount of up to $150,000, subject to an assets test.

In the year ended 30 June 2011 the husband applied for a payment under this scheme and sold the farm which was a pre CGT asset.

Due to a Centrelink administrative requirement, the ECEG application was lodged in the name of the husband only. However the wife also signed the form and (as confirmed by Centrelink guidelines for the ECEG) both of them are subject to the restrictive covenant conditions attached to the payment.

The 'Exceptional Circumstances Exit Package 2007 Policy Guidelines' form part or the facts of this ruling. Likewise, the 'Claim for Exceptional Circumstances Exit Grant' form confirming that both parties signed the application has also been included in the facts.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-35
Income Tax Assessment Act 1997, subsection 104-35(1)
Income Tax Assessment Act 1997, subsection 104-35(2)
Income Tax Assessment Act 1997, subsection 115-25(3)
Income Tax Assessment Act 1997, subsection 960-100(1)

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

Note: Unless otherwise stated, all subsequent legislative references are to the ITAA 1997.

Question 1

CGT event D1 happens under section 104-35 'if you create a contractual right or other legal or equitable right in another entity.'

Under subsection 960-100(1), an entity is defined as any of the following:

· an individual;

· a body corporate;

· a body politic;

· a partnership;

· any other unincorporated association or body of persons;

· a trust;

· a superannuation fund.

The Commonwealth is an entity for the purpose of CGT event D1.

Application to your circumstance
A contractual right was created when the husband entered into an agreement with the Commonwealth to receive an ECEG in return for not becoming involved in an agricultural enterprise for at least five years. As the wife also signed the agreement and is bound by the restrictive covenant a contractual right has also been created in relation her.

The restrictive covenant is a CGT asset in its own right. It is separate to the farm for which an A1 CGT event happened upon disposal.

Under subsection 104-35(3) a D1 capital gain will arise if the capital proceeds from creating the restrictive covenant are more than the incidental costs incurred in relation to it. A capital loss will arise if the capital proceeds are less than the incidental costs incurred in relation to it.

Question 2

Again, CGT event D1 happens under section 104-35 'if you create a contractual right or other legal or equitable right in another entity.'

Application to your circumstance

In this instance the restrictive covenant is created between the Commonwealth and both the husband and the wife. It follows that the 'you' referred to in subsection 104-35(1) is a reference to both parties.

Whilst the grant was made in the husband's name only, this was as a result of the administrative practices of Centrelink. The application process was such that only one individual could apply on behalf of the relevant entity carrying on the primary production business.

Despite this, the 'Exceptional Circumstances Exit Package 2007 Policy Guidelines' states the following:

It is a condition of the making of the EC Exit Grant that the applicant (and their partner, whether or not they remain a couple) who receives the grant must, by signing a statement, declare that they will not become an owner or operator of a farm enterprise within 5 years of exiting the farming industry based on the date of settlement of sale.

The Guidelines go on to state:

If an exit grant recipient becomes an owner or operator of a farm enterprise again in breach of their statement, the amount of the exit grant paid to the person is recoverable by the Commonwealth as a debt due to the Commonwealth.

The exit grant recipient is required to keep Centrelink informed of their residential address during the 5 year period. The person will also need to notify Centrelink if events or circumstances indicative of a return to farming or a change of address occur.

As a result of these conditions we find that a D1 CGT event happens equally to both parties and that the capital proceeds in relation to the ECEG will be assessed half to the husband and half to the wife.

Further issues for you to consider

CGT discount

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