Edited version of your written advice

Authorisation Number: 1013106192186

Date of advice: 12 October 2016

Ruling

Subject: Grant

Question 1

Is the grant assessable as ordinary income?

Answer

No.

Question 2

Do the capital gains tax (CGT) provisions apply to the grant?

Answer

Yes.

Question 3

Should the grant 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)?

Answer

Yes.

Question 4

Should your share of the amount relating to CGT event A1 be treated as capital proceeds for the asset sold?

Answer

Yes.

Question 5

Should your share of any amount relating to CGT event D1 be returned in the year in which the grant was received?

Answer

Yes.

Question 6

Should the grant be shared equally between you and your spouse?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 20YY

Year ended 30 June 20ZZ

The scheme commenced on

1 July 20XX

Relevant facts

You and your spouse owned an asset.

You conducted a business with your spouse using the asset.

You sold the asset.

You then submitted an application for a grant. The application form does not allow for a joint application. A single applicant is nominated.

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

You received a grant payment. The full amount of the grant was paid to you.

It was a condition arising from the grant that you cannot become an owner or operator of a specified enterprise again within a period.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 108-5

Detailed reasoning

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

Ordinary income

Subsection 6-5(2) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

• are earned,

• are expected,

• are relied upon, and

• have an element of periodicity, recurrence or regularity.

The Commissioner's view on the assessability of government payments to industry are set out in Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business. As outlined in paragraph 26 of TR 2006/3, government payments to industry to cease a business are not assessable as ordinary income under section 6-5 or as a bounty or subsidy in relation to carrying on a business under section 15-10.

The grant payment you received is not earned by you as it does not directly relate to your business or services performed. The payment is a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this alone does not convert the grant to ordinary assessable income.

The payment is not a normal incident of your business, nor is it paid for a purpose for which the business was carried on. The receipt was a direct result of you having sold your asset and agreeing not to carry on a certain business for a period. The grant payment is capital in nature and not assessable as ordinary income under section 6-5.

Section 6-10 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Amounts received as a lump sum payment are generally capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions.

Capital gains

Capital gains tax (CGT) is the tax you pay on certain gains you make. Section 102-20 states that a capital gain or capital loss is made only if a CGT event happens. For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset.

Section 108-5 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. Your asset is a CGT asset in terms of section 108-5.

Section 104-10 makes the disposal of a CGT asset a CGT event. You dispose of an asset when a change of ownership occurs from you to another entity. A sale of an asset is therefore a CGT event. The relevant event is CGT event A1.

As you also entered into a restrictive covenant not to operate a business for a period it follows that as well as CGT event A1, CGT event D1 may also be relevant when the grant money was paid to you.

CGT event A1

In accordance with the eligibility requirements, the grant was made in relation to the disposal of the underlying CGT asset to which it relates.

It is reasonable to conclude that where the partners who received the grant also owned the assets of the business that were sold then some portion of the grant relates to that original disposal.

Therefore, a portion of the payment is treated as being additional capital proceeds for the disposal of your asset.

CGT event D1

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

A contractual right was created when an agreement was entered into with the entity A under which a grant was received in return for not becoming involved in an enterprise for a period.

For CGT event D1 subsection 104-35(2) provides that the time of the event is when you enter into the contract or create the other right. That is, a CGT event D1 happened upon the signing of this agreement.

It follows that any capital gain apportioned to CGT event D1 in relation to the restrictive covenant will be included in the 20XX-YY financial year.

It is therefore appropriate that any capital gain in relation to the grant 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 a person is at retirement age or is 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 payment relates to CGT event D1.

Please note that you may be entitled to a CGT small business concession in relation to any capital gain made.

Grant money shared equally

In your circumstances, the agreement in relation to the grant was between entity A and both you and your spouse.

Whilst the grant was made in your name only, this was as a result of the administrative practices. The application process was such that only one individual could apply on behalf of the relevant entity carrying on the business.

As both you and your spouse owned the asset and you both agreed not to operate an enterprise for a period, it is considered that the grant should be split on a 50/50 basis between you and your spouse.

Therefore where you determine that some or all of the ECEG is received in relation to the CGT event A1 connected to the original disposal of the asset, then it happens equally to both parties on the basis that you and your spouse owned the partnership assets equally.

Similarly if you determine that some of the grant is received in relation to the CGT event D1 then it happens equally to both you and your spouse.