Edited version of your private ruling

Authorisation Number: 1012617800736

Ruling

Subject: Professional practice: relocation and infrastructure grants

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In 20XX, you signed an agreement to commence a new professional practice in a remote area. You received a grant consisting of two payments: (i) a relocation grant, payable upon receipt of evidence of commencing service; and (ii) an infrastructure grant, for equipment and capital works, as approved.

The requirements of the relocation grant is you commence practice by 20XX. If you do not continue the practice for a X year period, for specified hours, you must repay both grants.

You do not currently carry out any business activity in your individual name but you do currently run a practice in City A through a trust structure.

You will be a small business entity when you establish your new business structure.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-10

Income Tax Assessment Act 1997 Section 20-15

Income Tax Assessment Act 1997 Section 20-25

Income Tax Assessment Act 1997 Section 20-30

Income Tax Assessment Act 1997 Section 110-45

Income Tax Assessment Act 1997 Section 118-37

Income Tax Assessment Act 1997 Section 152-12

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-205

Reasons for decision

Taxation Ruling TR 2006/3 is about government payments to industry to assist entities (including individuals) to continue, commence or cease business. Paragraphs 26, 27, 28, 6 and 66 state:

Government payments to industry to commence or cease a business are not assessable as ordinary income of the recipient under section 6-5 or as a bounty or subsidy in relation to carrying on a business under section 15-10. However, the GPI may give rise to an assessable recoupment under Subdivision 20-A.

A GPI received to assist the recipient to commence business with the purchase of a depreciating asset, the cost of which is deductible under Division 40, is assessable income under the assessable recoupment provisions in Subdivision 20-A.

A GPI received to commence or cease business, which reimburses the cost of professional taxation advice deductible under section 25-5, is assessable income under the assessable recoupment provisions in Subdivision 20-A.

In cases where a contractual or other right is created by the taxpayer entering into an agreement in return for the payment (for example - a GPI received for entering into a restraint of trade agreement), CGT event D1 will apply and the receipt will form part of the capital proceeds for the event.

If the payment recoups expenditure forming one of the elements of the cost base, the cost base is taken never to have included the original expenditure, thus potentially increasing a future capital gain or decreasing a future capital loss; however, the payment will not itself give rise to a capital gain.

The amount received for relocating the medical practice to a country region (in contrast to making the city practice bigger or more efficient) is capital in nature and is not received in relation to carrying on a business. Therefore, the amount is not assessable as ordinary income under section 6-5 or assessable as income under section 15-10. However any amount which is a reimbursement of certain deductible expenses, for example capital costs deductible under section 40-880 for ending a practice, is an assessable recoupment under Subdivision 20-A. The recipient of the GPI will need to consider whether there are any CGT consequences (see paragraph 6 of this Ruling).

Subsection 118-37(2) of the ITAA 1997 provides a capital gain or capital loss is disregarded if you make it as a result of receiving a payment as reimbursement or payment of your expenses under a scheme established by an Australian government agency under an enactment or an instrument of a legislative character or the General Practice Rural Incentives Program or the Rural and Remote General Practice Program.

Subsection 110-45(3) of the ITAA 1997 states expenditure does not form part of any element of the cost base to the extent of any amount you have received as recoupment of it (except so far as the amount is included in your assessable income).

Section 152-205 of the ITAA 1997 provides you with the small business 50% reduction if the basic conditions in Subdivision 152-A are satisfied for the gain, which include: (i) you are a small business entity for the income year and (ii) under section152-12, 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. Under section 152-35, a CGT asset satisfies the active asset test if you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period that begins when you acquired the asset and ends at the CGT event. Section 152-40 explains an active asset includes an asset used, or held ready for use, by you in the course of carrying on a business.

In your case, paragraphs 26 and 66 of TR 2006/3 provide your payments will not be assessable under section 6-5 or section 15-10 of the ITAA 1997. However, your relocation payment will not qualify for the exemption under subsection 118-37(2) of the ITAA 1997 because it will not be a payment as a reimbursement of your expenses. Instead, your relocation payment is an incentive payment for creating and restricting your business structure to operate in a certain location for a certain period of time. Since your relocation payment ultimately is a restrictive covenant (per paragraph 6 of TR 2006/3), the payment you receive will be for the happening of a CGT event D1 (creating contractual rights), which will qualify for the small business reduction under section 152-205 of the ITAA 1997.

Paragraph 27 and 28 of TR 2006/3 deem any part of your infrastructure payment used to purchase depreciating assets or other items listed in the tables in section 20-30 of the ITAA 1997 will be treated as an assessable recoupment under Subdivision 20-A of the ITAA 1997, in accordance to the operational rules in sections 20-35 to 20-55.

As for any infrastructure payments received in relation to the purchase of any CGT assets, subsection 118-37(2) of the ITAA 1997 will apply to exempt the payments from immediate assessability (that is, exempt the payments in relation to the happening of CGT event C2 that occurs when the right to receive the payment is exercised and thus ended).

However, the application of subsection 118-37(2) of the ITAA 1997 will not exempt the operation of subsection 110-45(3) of the ITAA 1997, which (per paragraph 6 of TR 2006/3) reduces your relevant CGT cost bases by the relevant amounts that serve to recoup your capital expenditure.