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Edited version of your private ruling
Authorisation Number: 1012466573464
Ruling
Subject: CGT - 50% discount eligibility
Question 1
Are you eligible for the 50% discount on a capital gain made from the receipt of the Exceptional Circumstances Exit Grant?
Answer
No
This ruling applies for the following periods
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You sold your farming land (the property) in 20XX.
You had conducted a farming business on the property since 20YY.
You received a payment under the Exceptional Circumstances Exit Grant (ECEG).
Payment of the ECEG was contingent on your agreement not to own or operate a farm within five years of exiting the farming industry.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 104-35
Income Tax Assessment Act 1997 subsection 104-35(2)
Income Tax Assessment Act 1997 subsection 104-35(3)
Income Tax Assessment Act 1997 Division 115
Income Tax Assessment Act 1997 subsection 115-25(3)
Reasons for decision
Detailed reasoning
CGT event A1 happens under section 104-10 Income Tax Assessment Act 1997 (ITAA 1997) if you dispose of a CGT asset by affecting a change of ownership from you to another entity, whether because of some act or event or by operation of law. Therefore, CGT event A1 occurred when you disposed of the property.
CGT event D1 under section 104-35 of the ITAA 1997 happens if you create contractual or other rights in another entity.
Subsection 104-35(2) of the ITAA 1997 provides that the timing of the event is when you enter into the contract or create the right.
Finally, subsection 104-35(3) ITAA 1997 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 with respect to the Exceptional Circumstances Exit Grant (ECEG), a contractual right was created when you entered into an agreement with the Commonwealth to abide by the condition of a restrictive covenant which precludes you from owning or operating a farming enterprise for at least five years.
Whilst the disposal of your farm satisfied a qualification requirement in relation to your eligibility to apply for the ECEG, it remains that the funding was paid in relation to the right (restrictive covenant), which is a separate CGT asset and which was created upon the signing of the agreement. As such, CGT event D1 is considered to have happened at the time you entered into this agreement, and is the relevant CGT event in relation to the ECEG
You will make a capital gain if the capital proceeds exceed any incidental costs that you may have incurred. 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.
Therefore, you cannot apply the 50% discount to any capital gain arising from the CGT event.