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Edited version of your private ruling
Authorisation Number: 1012440904072
Ruling
Subject: taxation of unique payment
Questions
1. Is the payment from your former business associate assessable as ordinary or statutory income?
Answer: No
2. Is the payment from your former business associate assessable under the capital gains tax (CGT) provisions?
Answer: No
This ruling applies for the following period
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts
Directors A and B were the only shareholders in the company.
Director A transferred their shares for consideration to director B and resigned from the company as per a succession agreement.
In addition, director A made an unsolicited cash payment to director B. There was no contractual obligation for director A to make the payment and no consideration was given from director B.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 6-10
Income Tax Assessment Act 1997 section 120-5
Income Tax Assessment Act 1997 section 108-5
Reasons for decision
Ordinary and statutory income
In order to be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) the payment made by director A to director B must be 'ordinary income', defined in section 6-5 of the ITAA 1997 as 'income according to ordinary concepts'. What is 'income according to ordinary concepts' has never been clearly defined, however none of the factors that usually give an amount the character of 'income according to ordinary concepts' are present in this instance.
The payment is not directly attributable to employment or a service rendered, there is no periodicity, it does not result from a transaction on which the taxpayer intended to make a profit, the payment is not in the nature of a return on an investment.
As a result it is considered that the payment is not 'income according to ordinary concepts' and is therefore not assessable under section 6-5 (ITAA 1997).
Section 6-10 of the ITAA 1997 includes income that is not 'ordinary income', also called 'statutory income', in the assessable income of taxpayers. A list of the specific provisions that render certain amounts assessable is contained in section 10-5 of the ITAA 1997.
The payment does not fall into any of the categories specified in section 10-5 of the ITAA 1997 therefore it is not assessable as statutory income.
CGT provisions
According to section 120-5 of the ITAA 1997, a capital gain or loss can only be made when a CGT event occurs.
Australian currency, being Australian notes issued by the Reserve Bank of Australia or Australian coins issued on the authority of the Federal Treasurer, is not a CGT asset under section 108-5 of the ITAA 1997 when it is used as legal tender. In this circumstance, Australian currency serves as a medium of exchange to facilitate a transaction. The transfer of the cash from director A to director B is not a disposal of a CGT asset as in this instance the Australian currency is not a CGT asset. The payment does not extinguish any right or obligation as none was present in relation to the payment. There was no contractual requirement for Wayne to make the payment. Therefore no CGT event has occurred.
As no CGT even has occurred in your situation, the payment is not assessable under the CGT provisions.