Private ruling: Capital gains tax
Date of advice: 15 August 2025
Published: 27 October 2025
Ruling period: Income year ending 30 June 20XX | Income year ending 30 June 20XX | Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: When the right was awarded by the Council to the Trust, does the Commissioner agree that no item of ordinary income or statutory income arose under section 6-5 or section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) respectively? | A1: Yes | Q2: If the answer to question 1 is no, under what provision of the ITAA 1997 is it assessed under, or is it a cost base adjustment? | A2: As the answer to question 1 is yes, it is not necessary to rule on this question. | Q3: Does the Commissioner agree that the disposal of the right by the Trust would be a CGT event, specifically CGT event A1, pursuant to section 104-10 of the ITAA 1997 and that the CGT discount, pursuant to section 115-5 of the ITAA 1997, could apply to the disposal of the right by the Trust, where the asset has been held for more than 12 months? | A3: Yes, but section 115-5 of the ITAA 1997 will only apply if the right is held for at least 12 months. | Q4: In determining the first element of the cost base of the right, does the Commissioner agree that the market value substitution rule, per section 112-20 of the ITAA 1997 should apply, as the Trust acquired the right for nil consideration? | A4: No | Q5: If the answer to question 4 is yes, does the Commissioner consider it a fair and reasonable approach, and consequently permissible, to determine that the first element of the cost base attributable to the right should be the value listed by the Council? | A5: As the answer to question 4 is no, it is not necessary to rule on this question. | Q6: If the answer to 5 is no, how is the value attributed to the first element of the cost base of the right? | A6: As the answer to question 4 is no, it is not necessary to rule on this question

Relevant facts and circumstances: 1. The Trust was awarded the right from the Council. 2. The Council has a scheme for the right. 3. The Trust had to apply for the right. 4. The Trust did not pay any consideration to acquire the right. 5. The Trust can sell the right it was awarded to a third party. 6. The Trust sold some of the right. 7. The Trust did not acquire the right at least 12 months before it was sold.

Relevant legislative provisions: Section 6-5 of the Income Tax Assessment Act 1997 | Section 6-10 of the Income Tax Assessment Act 1997 | Section 10-5 of the Income Tax Assessment Act 1997 | Section 104-10 of the Income Tax Assessment Act 1997 | Section 104-35 of the Income Tax Assessment Act 1997 | Section 108-5 of the Income Tax Assessment Act 1997 | Section 110-25 of the Income Tax Assessment Act 1997 | Section 112-20 of the Income Tax Assessment Act 1997 | Section 115-5 of the Income Tax Assessment Act 1997 | Section 115-10 of the Income Tax Assessment Act 1997 | Section 115-15 of the Income Tax Assessment Act 1997 | Section 115-20 of the Income Tax Assessment Act 1997 | Section 115-25 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Detailed reasoning Subsection 6-5(1) of the ITAA 1997 states 'your assessable income includes income according to ordinary concepts, which is called ordinary income'. Subsection 6-5(2) of the ITAA 1997 states that 'if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year'. Taxation Ruling TR 2006/3 Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business (TR 2006/3) states the following about the meaning of ordinary income: 84. 'Ordinary income' includes income according to ordinary concepts. Income according to ordinary concepts is not defined in the taxation legislation. The characteristics of ordinary income have been developed by case law and generally fall into three categories: • income from providing personal services; • income from property; or • income from carrying on a business. 85. Case law has established the following guidelines to assist in determining the nature of a receipt: • the nature of a payment is determined by examining the character of the payment in the hands of the recipient; • regard must be given to all facts, as such a broad view must be taken of a taxpayer's situation and it is necessary to consider the total situation of the taxpayer; • it is necessary to apply 'a business conception to the facts of the case'; • the test in determining if a payment is income or capital is an objective test; • the question is not decided by determining whether the expenditure by the payer is revenue or capital in nature; • the question is not decided by determining whether any expenditure the recipient is required to make is revenue or capital in nature; • the question is not decided by determining the nature of the measure used to calculate the payment; • where a recipient provides consideration for a payment, the nature of that consideration is generally taken to be the nature of the payment; • a payment that is provided for a purpose which is not part of the recipient's business will not be income in nature; • periodicity, regularity or recurrence may show a payment to be income; • a payment paid in consideration for the performance of services is generally income; • calculation of a payment by reference to expected profits made, or not made by the recipient but that would ordinarily have been expected to have been made, is a factor supporting a conclusion of income; • a payment provided for a particular revenue expense is a factor supporting a conclusion of income; • a payment from an isolated transaction entered into with an intention to profit may still be income; • a payment in a lump sum does not require a conclusion that the payment is capital; • a payment made to compensate for the restriction of a person's capacity to perform services or to carry on a business may be a capital payment; • a payment by gift or subsidy to replenish or augment the recipient's capital is not income under ordinary concepts as it is not a product or incident of the recipient's income producing activity; • a payment for the sterilisation of a capital asset of a business is a capital receipt; and • a payment for surrender of part of the profit earning structure is a capital receipt. The Trust was awarded the right by the Council. The Trust had to apply for the right. The right is not income from providing personal services, income from property or income from carrying on a business. The right is not ordinary income and is not assessable income under section 6-5 of the ITAA 1997. Subsection 6-10(2) of the ITAA 1997 states 'amounts that are not ordinary income, but are in included in your assessable income by provisions about assessable income, are called statutory income'. Subsection 6-10(4) of the ITAA 1997 states that 'if you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia'. Section 10-5 of the ITAA 1997 provides a list of provisions that cause amounts that are not ordinary income to be included in assessable income (statutory income). None of the provisions listed in section 10-5 will apply to the award of the right. The right is not statutory income and is not assessable income under section 6-10 of the ITAA 1997. Detailed reasoning Subsection 108-5(1) of the ITAA 1997 provides the meaning of CGT asset: A CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. The meaning of property was considered in Hepples v FC of T 90 ATC 4497 ( Hepples ), where the Full Federal Court considered whether the right to work was an asset for the purpose of Part IIIA (the former CGT provisions). According to the Full Federal Court the essential characteristic of an item of property is that it can in some way be assigned, transmitted or turned to account with a third party ( Hepples was appealed to the High Court; Hepples v FC of T 91 ATC 4808, but in that case there was limited analysis of the meaning of asset). The right is definable, is identifiable by third parties, and is capable of being assigned to third parties. The right is considered to be a proprietary right, and is a CGT asset. Subsection 104-10(1) of the ITAA 1997 states that 'CGT event A1 happens if you dispose of a CGT asset'. Subsection 104-10(2) of the ITAA 1997 provides that 'you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner'. CGT event A1 happened when the Trust sold the right. Section 115-5 of the ITAA 1997 states that 'a discount capital gain is a capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25'. Section 115-10 of the ITAA 1997 states that 'to be a discount capital gain, the capital gain must be made by: (a) an individual; or (b) a complying superannuation entity; or (c) a trust; or (d) a life insurance company...'. Section 115-15 of the ITAA 1997 states 'to be a discount capital gain, the capital gain must result from a CGT event happening after ... 21 September 1999'. Subsection 115-20(1) of the ITAA 1997 states 'to be a discount capital gain, the capital gain must have been worked out: (a) using a cost base that has been calculated without reference to indexation at any time...'. Subsection 115-25(1) of the ITAA 1997 states '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 the current circumstances, the Trust is a trust, any capital gain from the sale of the right happened after 21 September 1999, and the capital gain is not eligible to be worked out using an indexed cost base. The requirements of sections 115-10, 115-15 and 115-20 of the ITAA 1997 are satisfied. However, the Trust did not acquire the right (CGT asset) at least 12 months before it was sold. The requirement in subsection 115-25(1) of the ITAA 1997 is not satisfied. As the requirements of section 115-5 of the ITAA 1997 are not satisfied (the capital gain does not meet the requirement of section 115-25 of the ITAA 1997), any capital gains that resulted from the sale of the right will not be discount capital gains. Detailed reasoning Subsection 110-25(1) of the ITAA 1997 states that 'the cost base of a CGT asset consists of 5 elements'. Subsection 110-25(2) of the ITAA 1997 states that 'the first element is the total of: (a) the money you paid, or are required to pay, in respect of acquiring it; and (b) the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of acquisition)'. Subsection 112-20(1) of the ITAA 1997 states 'the first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if: (a) you did not incur expenditure to acquire it, except where acquisition of the asset resulted from: (i) CGT event D1 happening; or (ii) another entity doing something that did not constitute a CGT event happening; or (b) some or all of the expenditure you incurred to acquire it cannot be valued; or (c) you did not deal at arm's length with the other entity in connection with the acquisition. The expenditure can include giving property...'. Subsection 112-20(3) of the ITAA 1997 states that 'there are some situations in which the rule in subsection (1) does not apply. They include the situations set out in this table: Exceptions to the market value substitution rule Item You acquired this CGT asset: ...in this situation: ... ... ... 3 A contractual or other legal or equitable right resulting from CGT event D1 happening You did not pay or give anything for it ... ... ...' Subsection 104-35(1) of the ITAA 1997 states that 'CGT Event D1 happens if you create a contractual right or other legal or equitable right in another entity'. The Trust was awarded the right by the Council. The Trust had to apply for the right. You advise that the Trust did not pay any consideration for the acquisition of the right (CGT asset). As discussed in question 3, the right is a proprietary right that can be assigned by the Trust. When the Council awarded the right to the Trust it created legal rights in the Trust; CGT event D1 happened. The Trust's acquisition of the right resulted from CGT event D1 happening. As such, subsection 112-20(1) of the ITAA 1997 will not apply to treat the first element of cost base of the right (CGT asset) as its market value at the time of acquisition.