Private ruling: Exceptional Circumstances Exit Grant
Published: February 2012
Ruling period: Year ended 30 June 2011

Ruling: Q1: Is the Exceptional Circumstances Exit Grant (ECEG) assessed as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Does capital gains tax (CGT) event D1 under section 104-35 of the ITAA 1997 happen upon receipt of the ECEG? | A2: Yes. | Q3: Should the capital gain be declared in the year of receipt by the funding recipient? | A3: Yes.

Relevant facts and circumstances: The Trust operated a business commencing post CGT and ceasing in 2010. The Trust was incurring significant losses which had been carried forward into 2010. Due to a Centrelink administrative requirement the ECEG application must be lodged in the name of an individual. Individual A successfully applied for an ECEG and the funding was approved and paid in the year ended 30 June 2011. The ECEG is an Australian Government package that is administered on the government's behalf by Centrelink. It is payable to farmers whose farm enterprise is located in an Exceptional Circumstances drought declared area and, having met certain eligibility criteria, sell their farming enterprise and undertake not to become an owner or operator of a farming enterprise again within a period of five years. The exit grant is for an amount of up to $150,000, subject to an assets test. Note that other documents which also form part of the facts of this application include: · Pilot of drought reform measures in WA - fact sheet · Frequently asked questions about the Exceptional Circumstances Exit Package · Primary production industry partnership minutes - 2 April 2011 · Farm exit support program - Policy guidelines July 2011 · Centrelink Farm Exit Support Claim introductory notes/instructions

Relevant legislative provisions: Income Tax Assessment Act 1997, subsection 6-5(1) | Income Tax Assessment Act 1997, section 104-35 | Income Tax Assessment Act 1997, subsection 104-35(2)

Reasons for decision: Summary: Subsection 6-5(1) provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). However, as there is no definition of ordinary income in income tax legislation, it is necessary to apply principles developed by the courts to the facts of a particular case. In accordance with Taxation Ruling TR 2006/3, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. A generally decisive consideration is whether the payment is the product in a real sense of any employment, services or business carried on by the recipient. A payment that is provided for a purpose which is not part of the recipient's business will not constitute ordinary income. | Detailed Reasoning - Application to your circumstance: The receipt of your ECEG is neither a normal incident of the business nor provided in relation to the purpose for which the business was carried on. The receipt was derived subsequent to the Trust having made a commitment to sell the farming business. It was paid in recognition of the Trust's agreement to sell off the business assets and also in relation to your commitment not to carry on a business of primary production within five years of the payment date. A compensation receipt generally takes the character of the item it replaces. Accordingly, because an amount received subsequent to the disposal of the primary production business and in relation to the imposition of a restrictive covenant would be capital in nature, so to is the compensation amount paid to you. It follows that the ECEG does not constitute ordinary assessable income under section 6-5. | Detailed Reasoning - Question 2: CGT event D1 happens under section 104-35 when a contractual or other legal or equitable right is created in favour of another entity. With regard to the ECEG, where the assets are held in a family company or trust prior to them being sold the individual grant applicant receives the grant solely for entering into an agreement with the Commonwealth under which he/she will not become an owner or operator of a farm for at least five years. In this instance a CGT event D1 happens. The amount the individual receives for entering into the agreement, known as a restrictive covenant, is the capital proceeds for the event. The individual makes a capital gain if the capital proceeds exceed the incidental costs he/she incurs in entering into the agreement. | Detailed Reasoning - Application to your circumstance: Even though the business was operated by the Trust it is a Centrelink requirement that it be an individual associated with that Trust, and not the Trust itself, who must lodge the application for funding. As Individual A was not the entity who disposed of the farm it therefore follows that the receipt of the grant cannot be considered to be in relation to the initial A1 CGT event that happened to the Trust upon the prerequisite disposal of the farm assets. The ECEG agreement provides that Individual A undertake not to become an owner or operator of a farming enterprise again within a period of five years in return for the funding. In terms of section 104-35 this restrictive covenant constitutes a right which gives rise to a D1 CGT event and the funding represents the capital proceeds in relation to this event. | Detailed Reasoning - Question 3: Subsection 104-35(2) states that 'The time of the event is when you enter into the contract or create the other right' (emphasis added). | Detailed Reasoning - Application to your circumstance: We recognise your argument that it is the cessation of the Trust business which made Individual A eligible for the ECEG and it is the Trust which has incurred losses in relation to the farming activities. However, from a taxation perspective it remains that Individual A is the recipient of the funding and under the agreement it is Individual A who enters into the contract not to farm for five years and therefore creates the right which gives rise to the D1 CGT event. It follows that any capital gain derived in relation to the ECEG is assessable to Individual A and must be returned in the taxation year in which the contract was entered into i.e. 30 June 2011. Note: If there are any other individuals who are also subject to the five year restriction under this agreement then the ECEG may be apportioned evenly with them.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Reasons for decision: Note: Unless otherwise stated, all subsequent legislative references are to the ITAA 1997.