Edited version of your private ruling

Authorisation Number: 1012041665623

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Assessability of an exceptional circumstances exit grant

Question 1

Should the Exceptional Circumstances Exit Grant (ECEG) be apportioned on a reasonable basis between CGT events A1 and D1 under sections 104-10 and 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997) respectively?

Answer

Yes.

Question 2

If, as a result of the reasonable apportionment some amount is assigned to CGT event A1 should this amount be returned in the year in which the original business assets were sold?

Answer

Yes.

Question 3

If, as a result of the reasonable apportionment some amount is assigned to CGT event D1 should this amount be returned in the year in which the ECEG was received?

Answer

Yes.

Question 4

If, based on the reasonable apportionment some part of the ECEG is assigned to a CGT event D1, does the paragraph 104-35(5)(b) of the ITAA 1997 exception apply?

Answer

No.

Question 5

Will the capital gain in relation to the ECEG be split on a 50/50 basis between both business partners?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Relevant facts and circumstances

You operated the farm in partnership. The farmland upon which the business was conducted was owned jointly.

With a view to accessing the ECEG funding the farmland was sold under a contract dated in the year ended 30 June 2010. Settlement occurred in the year ended 30 June 2011.

In the year ended 30 June 2010 an application was submitted in relation to the ECEG. The application was submitted in one partner's name and was signed by both partners.

You advise that the application form does not allow for a joint application. A single applicant must be nominated and then the spouse's details are provided later in the form.

An ECEG was approved and received in the year ended 30 June 2011. The approval notification was in the applicant partner's name only.

You provided an extract from a Centrelink publication which referenced the ECEG. It provides that the ECEG offered a one-off taxable payment of up to $150,000 for farmers who sold their farm enterprise (based on date of settlement) and lodged an ECEG application by 10 August 2011. It states that the ECEG is taxable.

The condition arising out of the ECEG is that an applicant cannot become an owner or operator of an agricultural enterprise again within five years.

A pre-condition before applying for the ECEG is that an applicant must have already sold their farmland.

You also provided a copy of your application form and the approval letter from Centrelink. Both of these documents form part of the facts of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-10

Income Tax Assessment Act 1997, section 104-10(3)

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, paragraph 104-35(5)(b)

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'.

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

Reasons for Decision

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:

(a) an individual;
(b) a body corporate;
(c) a body politic;
(d) a partnership;
(e) any other unincorporated association or body of persons;
(f) a trust;
(g) a superannuation fund.

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

CGT event A1 happens under section 104-10 'if you dispose of a CGT asset'.

Application to your circumstance
A contractual right was created when an agreement was entered into with the Commonwealth under which an ECEG was received in return for not becoming involved in an agricultural enterprise for at least five years. A D1 CGT event happened upon the signing of this agreement.

However, it is also reasonable to conclude that where the partners who received the ECEG also owned the assets of the business that were sold then some portion of the ECEG may relate to that original disposal. Under those circumstances part of the capital proceeds may pertain to the original A1 CGT event.

Depending on your circumstances, it is appropriate that any capital gain in relation to the ECEG may be apportioned on a reasonable basis between CGT events D1 and A1.

Note that in arriving at a reasonable apportionment you may wish to consider the extent to which the restrictive covenant will impact on you. Where you are at retirement age or are immediately embarking on an unrelated but long term career or employment opportunity it may be fair to conclude that very little, if any of the ECEG relates to the D1 CGT event.

Question 2
For A1 CGT events subsection 104-10(3) provides that the time of the event is when you enter into the contract for the disposal.

Application to your circumstance
You state that the farm was sold under a contract in the year ended 30 June 2010.

It follows that any capital gain apportioned to CGT event A1 and the original disposal will be included in the year ended 30 June 2010.

Question 3
For D1 CGT events subsection 104-35(2) provides that the time of the event is when you enter into the contract or create the other right.

Application to your circumstance
The right was created when you received a letter of approval in relation to the ECEG in the year ended 30 June 2011.

It follows that any capital gain apportioned to CGT event D1 in relation to the five year restrictive covenant will be included in the year ended 30 June 2011.

Question 4
For the purposes of a D1 CGT event paragraph 104-35(5)(b) states that 'CGT event D1 does not happen if … the right requires you to do something that is another CGT event that happens to you;' (emphasis added)

Application to your circumstance
Based on the premise that the appropriate CGT event is D1 you argue that the conditions of the ECEG are such that an applicant is necessarily required to sell their farmland and also not become an owner or operator of an agricultural enterprise again within five years. You state that the receipt of the ECEG was contingent upon the farmland being sold and that this act gave rise to an A1 CGT event which is the other CGT event which qualifies for the paragraph 104-35(5)(b) exception. You conclude that the ECEG proceeds should be included with the proceeds from the original sale of the farmland and comprise part of that same A1 CGT event calculation.

Yes, it is true that the ECEG was contingent upon the disposal of the farmland however this disposal was a precursory A1 CGT event which was undertaken for the purpose of satisfying the ECEG qualifying criteria. This A1 event is a separate CGT event which took place prior to the creation of the right, not as a result of its creation.

The disposal of the land constitutes a separate A1 CGT event, it does not form part of the transaction out of which the newly created right came into existence. The condition arising out of the creation of the right specifically relates to your commitment not to become an owner or operator of a farming enterprise again until the expiry of a five year period.

In terms of paragraph 104-35(5)(b) the right does not require you to 'do something that is another CGT event', the need to dispose of the farmland arose before the right came into existence. The use of the word 'requires' (and not 'required') in paragraph 104-35(5)(b) supports a conclusion that the other CGT event must necessarily arise out of the agreement under which the right is created. In this instance the agreement 'requires' you not to become an owner or operator of an agricultural enterprise within five years.

Therefore, if after apportioning on a reasonable basis you conclude that some part of the ECEG is appropriately deemed a D1 CGT event the paragraph 104-35(5)(b) exception will not apply.

Question 5
Again, CGT event D1 happens under section 104-35 'if you create a contractual right or other legal or equitable right in another entity.' (emphasis added)

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

Whilst the grant was made in the applicant partner'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 the ECEG should be split on a 50/50 basis between both partners.

If you determine that some or all of the ECEG is received in relation to the D1 CGT event then it happens equally to both partners.

If you determine that some or all of the ECEG is received in relation to the A1 CGT event connected to the original disposal then it too happens equally to both partners on the basis that they owned the partnership assets equally.

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).

A capital gain from a CGT event A1 may qualify as a discount capital gain provided it satisfies the requirements of Subdivision 115-A.