Edited version of your private ruling

Authorisation Number: 1012552699277

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

Will the capital gain in relation to the Exceptional Circumstances Exit Grant (ECEG) be split on a 50/50 basis between both partners?

Answer

Yes.

Question 3

Will you be able to apply the general discount and the active asset reduction to the A1 event?

Answer

Yes.

Question 4

Will you be able to apply the general discount to the D1 event?

Answer

No.

Question 5

Will you be able to apply the active asset reduction to the D1 event?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You operated a partnership from 19XX.

You meet the basic conditions for accessing the small business concessions.

With a view to accessing the ECEG funding land was sold in Month 20XX and associated rights were sold in Month 20XX.

You have declared both the capital gains in the relevant financial year.

In Month 20XX an application was submitted in relation to the ECEG. The application was submitted in one partners name and was signed by both partners.

The application form does not allow for a joint application.

An ECEG of $X was approved and received in the relevant financial year.

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

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

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, paragraph 104-35(5)(b)

Income Tax Assessment Act 1997, subsection 115-25(3)

Income Tax Assessment Act 1997, subsection 960-100(1)

Reasons for decision

Question 1

CGT event D1 happens under section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997) 'if you create a contractual right or other legal or equitable right in another entity.'

Under subsection 960-100(1) of the ITAA 1997, 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 of the ITAA 1997 'if you dispose of a CGT asset'.

In your case, 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 the industry 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.

Question 2

Again, CGT event D1 happens under section 104-35 of ITAA 1997 'if you create a contractual right or other legal or equitable right in another entity.'

For D1 CGT events subsection 104-35(2) of the ITAA 1997 provides that the time of the event is when you enter into the contract or create the other right.

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) of the ITAA 1997 is a reference to both parties.

Whilst the grant was made in one partners 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 X enterprise within 5 years of exiting the X 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 X 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 the industry 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 parties.

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 parties on the basis that they owned the partnership assets equally.

Question 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 of the ITAA 1997.

As per subsection 115-25(1) of the ITAA 1997 to be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event. In your circumstances, you purchased the land and the associated rights in 19XX and sold them in 20XX and 20XX respectively. Both assets have satisfied the requirements and are eligible to access the discount capital gain.

A CGT asset is an active asset at a time if, at that time you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by you, your affiliate or another entity that is connected with you.

The active asset test is contained in section 152-35 of the ITAA 1997. Where you have owned the asset for more than 15 years, the active asset test is satisfied if the asset was an active asset of yours for at least seven and a half years of the test period detailed below.

The test period:

· begins when you acquired the asset, and

· ends at the earlier of

o the CGT event, and

o when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

In your case, you have owned both assets since 19XX and they have been continuously used in the course of carrying on your business. Therefore, they are both considered to be active assets.

To apply the small business 50% active asset reduction, you only need to satisfy the basic conditions. There are no further requirements. As you have satisfied that basic conditions you can apply the 50% active asset reduction.

Question 4

A capital gain from a CGT event D1 is not a discount capital gain in accordance with subsection 115-25(3) of the ITAA 1997.

Question 5

There are special conditions for the active asset test if CGT event D1 occurs. The standard conditions in paragraphs 152-10(1)(a) and (b) of the ITAA 1997 do not apply, instead it is a basic condition under subsection 152-12 of the ITAA 1997 that the right you create that triggers the CGT event must be inherently connected with a CGT asset of yours that satisfies the active asset test.

In your case, CGT event D1 happened upon the signing of the agreement. The land and the associated rights sold in the 20XX and 20XX financial years respectively, satisfied the active asset test. Therefore, the right created is considered inherently connected with a CGT asset of yours that satisfies the active asset test and therefore you are eligible to access the active asset reduction in regards to the D1 event.