Private ruling: Government grant
Published: December 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the grant assessable as a capital gain to both you and your spouse? | A1: Yes. | Q2: Are you entitled to apply the 50% discount in Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997) to the capital gain? | A3: No.

Relevant facts and circumstances: You and your spouse operated a business through a trust. The trust carried on the business and owned the relevant properties. The operation ran into financial hardship and the trust was placed into receivership. The properties were sold at a significant capital loss. During the period of the trust's operations, it did not make a profit for distribution. Losses of both a revenue and capital nature have been retained in the trust. You and your spouse applied for and received a government grant (the grant) The claim form lodged with the government agency was signed by you and your spouse. A condition of receiving the grant is that you and your spouse both agree to not return to the industry within X years from the date of settlement.

Relevant legislative provisions: Income Tax Assessment Act 1997 section104-35 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 115-10 | Income Tax Assessment Act 1997 subsection 115-25(3) | Income Tax Assessment Act 1997 paragraph 152-10(1)(a) | Income Tax Assessment Act 1997 paragraph 152-10(1)(b) | Income Tax Assessment Act 1997 section 152-12

Reasons for decision: Summary: You will only make a capital gain or capital loss if a CGT event happens. Under section 104-35 of the ITAA 1997 CGT event D1 happens when a contractual or other legal or equitable right is created in favour of another entity. The restrictive covenant, being the agreement with the Commonwealth, is a CGT asset under section 108-5 of the ITAA 1997. In this case, you and your spouse entered into an agreement with the Commonwealth. A condition of this agreement was that you and your spouse not return to the industry within X years from the date of settlement. CGT event D1 occurred when you and your spouse entered into the agreement with the government agency. Therefore, the grant is assessable to both you and your spouse. Under section 115-10 of the Income Tax Assessment Act 1997 (ITAA 1997), to qualify for the 50% general discount a capital gain must be made by an individual, a complying superannuation entity, a trust or a life insurance company. The capital gain must result from a capital gains tax (CGT) event happening after 11:45am on 21 September 1999 and must not have an indexed cost base. Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event. However, a capital gain from CGT event D1 is not a discount capital gain in accordance with subsection 115-25(3). Therefore, you and your spouse are not entitled to apply the general discount to the capital gain. According to the Advanced guide to capital gains tax concessions for small business 2010-11 , to qualify for the small business CGT concessions, you must satisfy several conditions that are common to all concessions. Theses are called the basic conditions. The basic conditions require the entity to satisfy the maximum net asset value test or be considered a small business entity for the income year. To satisfy the MNAVT, your assets and those of any affiliates or connected entities must be less than $6 million. To be a small business entity you must have an aggregated turnover of less than $2 million. The basic conditions also include the active asset test. A CGT asset is an active asset at a given time if, at the time you own it and it is used (or held ready for use) in the course of carrying on a business by you, a small business CGT affiliate of yours or an entity connected with you. There are special conditions for the active asset test if CGT event D1 occurs. The standard conditions in paragraphs 152-10(1)(a) and (b) do not apply, instead it is a basic condition under subsection 152-12 that 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. In this case, you and your spouse were not carrying on a business and did not own the relevant properties. The trust was carrying on the business and was the owner of the properties. You and your spouse did not own an active asset and do not satisfy the basic conditions for the small business capital gains tax concessions. Therefore, you and your spouse are not entitled to apply the small business rollover concession.

Are you entitled to apply the small business rollover to the capital gain?