Private ruling: Capital gains tax
Published: October 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Did a capital gains tax (CGT) event occur when you received the exit grant? | A1: Yes. | Q2: Do you satisfy the basic conditions for the small business CGT concessions? | A2: Yes.

Relevant facts and circumstances: You purchased a property. The property was used solely to run a business during the ownership period. You sold your property due to financial stress and being unable to meet all your debts. You were deemed eligible, and received, an exit grant. In order to be eligible for the grant, you were required to agree to not become an owner or operator of an enterprise within five years of exiting the industry. You are a small business entity. You satisfy the maximum net asset value test.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10, | Income Tax Assessment Act 1997 section 104-35, | Income Tax Assessment Act 1997 section 152-10, | Income Tax Assessment Act 1997 section 152-35, and | Income Tax Assessment Act 1997 section 152-40.

Reasons for decision: Summary: CGT event A1 happens under section 104-10 if you dispose of a CGT asset by affecting a change of ownership from you to another entity, whether because of some act or event or by operation of law. CGT event D1 happens under section 104-35 when a contractual or other legal or equitable right is created in favour of another entity. Taxation Ruling TR 1999/16 addresses capital gains and the goodwill of a business. At paragraph 33 it provides that a restrictive covenant is inextricably linked to the value of any goodwill disposed of. If during the disposal of a business a specific part of the sale proceeds is not allocated to the covenant, then for the purposes of Part 3-1 we will treat the giving of the covenant as being ancillary to the disposal of the goodwill of the business and no part of the proceeds will be attributed to the grant of the restrictive covenant. | Detailed Reasoning - Application to your circumstance: As you entered into the agreement and owned the property in your own right, as a sole trader, the grant represents capital proceeds for both the sale of the farm assets and the agreement not to commence another farming enterprise for five years. However, in accordance with the direction provided in paragraph 33 of TR 1999/16, we have determined that because no identifiable part of the grant was paid specifically in relation to the restrictive covenant it is reasonable to allocate the entire exit grant to the sale of the farm assets. Given that the relevant CGT event in relation to the sale of those assets is A1 it follows that the appropriate CGT event pertaining to the receipt of the grant is also A1. The grant should be apportioned across the assets on a reasonable basis. The relative market values of the assets at the time of their sale would generally represent a reasonable basis upon which to apportion the capital proceeds from the grant. | Detailed Reasoning - Small business CGT concessions: There are four capital gains tax (CGT) small business concessions that apply after 11.45am on 21 September 1999 which are: § the 15-year retirement exemption § the 50% active asset reduction § the $500,000 lifetime limit retirement exemption, and § rollover (replacement of business assets) relief Before considering any of these concessions, there are certain basic conditions which must be satisfied. Section 152-10 outlines the basic conditions for relief where a capital gain may be reduced or disregarded. These conditions are as follows: a) a CGT event happens in relation to a CGT asset b) the event results in a gain c) at least one of the following applies i. the taxpayer is a small business entity for the income year ii. the maximum net asset value test is satisfied iii. the taxpayer is a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership d) the CGT asset satisfies the active asset test. In your case, as discussed above, a CGT event occurred when you sold your farming property. The disposal of this asset resulted in a capital gain. The aggregated turnover of your business is under $2 million (you are a small business entity) and the value of you and your affiliates assets is less than $6 million (you satisfy the maximum net asset value test). | Detailed Reasoning - The active asset test: This test requires the CGT asset to be an active asset for: · 7 years, if owned for more than 15 years, or · half of the ownership period if owned for 15 years or less (section 152-35). An active asset may be a tangible asset or an intangible asset. A tangible or intangible asset is a CGT active asset if it is used or held ready for use in the course of carrying on a business by: · the taxpayer · the taxpayer's spouse or child under 18 years · the taxpayer's affiliate, or · an entity connected with the taxpayer (paragraph 152-40(1)(a)). In your case, you purchased property. This property has been used in the course of carrying on your business up until it was sold. The asset has been used in carrying on your business for the entire ownership period. Therefore, it will satisfy the active asset test. | Detailed Reasoning - Conclusion: The basic conditions in section 152-10 have been satisfied. Therefore, you are eligible for the small business capital gains tax concessions.

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 Income Tax Assessment Act 1997.