Private ruling: Exit grant
Published: June 2013
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Are the payments you have received under an industry exit grant program assessable as ordinary income? | A1: No. | Q2: Are grant payments you have received under an industry exit grant program assessable as statutory income? | A2: Yes.

Relevant facts and circumstances: You are a sole trader. You applied for, and were successful in being awarded an industry exit grant. By signing the required documentation you have agreed to cease your business operations and not re-enter the industry for an extended period of time. You have received an undissected lump sum. You have all your equipment up for sale but to date you have only sold one item.

Relevant legislative provisions: Income Tax Assessment Act 1997 Sub section 6-5(1) | Income Tax Assessment Act 1997 S ection 6-5 | Income Tax Assessment Act 1997 Section 15-10 | Income Tax Assessment Act 1997 Subdivision 20-A | Income Tax Assessment Act 1997 Section 20-30 | Income Tax Assessment Act 1997 Section 20-25 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Section 102-5

Reasons for decision: Summary: Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. Ordinary income 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. Whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. In G P International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation , the Full High Court stated: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. In addition, the following principles are relevant when determining the nature of a receipt: · the question is not determined by 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 · a payment to compensate for the restriction of a person's capacity to perform services or to carry on a business may be a capital payment and · a compensation receipt generally takes the character of the item it replaces. Compensation for the loss of a capital asset or an enduring part of a taxpayer's profit-yielding structure will be capital in nature. The grant payment has been made in consideration of you ceasing your business operations and agreeing not to re-enter the industry for an extended period of time. It is a payment for the surrender of a profit-yielding structure. The surrender is neither a normal incident of your business, nor is it a payment provided for a purpose for which the business was carried on. The payment is capital in nature and is not ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Section 15-10 of the ITAA 1997: bounty or subsidy: Where the payment is not assessable as ordinary income, consideration needs to be given to whether section 15-10 of the ITAA 1997 applies. Section 15-10 of the ITAA 1997 provides that an amount is included in assessable income if it is: · a bounty or subsidy · received in relation to carrying on a business and · not assessable as ordinary income under section 6-5 of the ITAA 1997. The term 'bounty' and 'subsidy' are not defined in income tax legislation. Following the decisions in The Squatting Investment Co Ltd v. Federal Commissioner of Taxation , Reckitt and Colman Pty Ltd v. Federal Commissioner of Taxation and First Provincial Building Society Ltd v. Commissioner of Taxation ( First Provincial ) , it is accepted that a 'subsidy' or 'bounty' includes payments of financial assistance by a government. A bounty or subsidy will be 'in relation to' carrying on a business when there is a real connection between the payment and the business. The term 'in relation to' includes within its scope payments that have a direct or indirect connection to the business. As stated by Hill J in First Provincial case : The words 'in relation to' are words of wide import. They are capable of referring to any relationship between two subject matters, in the present case the receipt of the bounty or subsidy, on the one hand, and the carrying on of the business, on the other ... the degree of connection will be 'a matter of judgment on the facts of each case'. ...What is necessary, at the least, in the present context is that there be a real connection ... the relationship need not be direct, it may also be indirect. A bounty or subsidy must be related to 'carrying on' the business, not merely for commencing or ceasing a business. As stated by Hill J in the First Provincial case: ... the relationship must be to the 'carrying on' of the business. These words may perhaps be understood in opposition to a relationship with the actual business itself. They would make it clear, for example, that a bounty received, merely in relation to the commencement of a business or the cessation of the business, would not be caught. The expression 'carrying on of the business' looks, in my opinion, to the activities of that business which are directed towards the gaining or producing of assessable income, rather than merely to the business itself. When government payments are received as assistance either to cease a business or give up or sell part of a profit yielding structure, they are not received in relation to 'carrying on' a business The grant payment has been made in consideration of you ceasing your business operations and agreeing not to re-enter the industry for an extended period of time. The payment is not directed at the income earning activity of the business and is not a bounty or subsidy in relation to the carrying on of a business and is not assessable under section 15-10 of the ITAA 1997. | Detailed Reasoning - Subdivision 20-Aof the ITAA 1997: assessable recoupment: The assessable recoupment provisions in Subdivision 20-A of the ITAA 1997 need to be considered where a payment is received as recoupment of certain deductible losses or outgoings and the payment is not otherwise assessable. An amount is an assessable recoupment to the extent that it is: · not income under ordinary concepts or otherwise assessable; and · received either: § by way of insurance or indemnity as recoupment of a deductible loss or outgoing or § as recoupment (other than by way of insurance or indemnity) of a deductible loss or outgoing that is listed in the table in section 20-30 of the ITAA 1997. Recoupment of a loss or outgoing is defined in section 20-25 of the ITAA 1997 to include: · any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery however described and · a grant in respect of the loss or outgoing. In your case you have received the grant payment for signing an agreement to exit the industry for an extended period of time. As a result of you ceasing your business, you may incur a loss in value of some of your assets. The grant payment is not an amount received by way of insurance or indemnity nor is it a recoupment of a loss or outgoing for which a deduction is available under a provision listed in section 20-30 of the ITAA 1997. Accordingly, the amount is not an assessable recoupment under Subdivision 20-A of the ITAA 1997. | Detailed Reasoning - Capital Gains Tax (CGT): Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains. Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a look-through approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. The disposal of a taxpayer's right to seek compensation triggers the capital gains tax provisions and the amount received is treated as capital proceeds. The grant you have received is an undissected lump sum for the satisfaction of your right to seek compensation from the government. The grant payments you have received are statutory income and assessable as a capital gain.