Private ruling: capital gains tax
Published: May 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 July 2009

Ruling: Q1: Should the Exceptional Circumstances Exit Grant (ECEG) be apportioned on a reasonable basis between CGT events A1 and D1 under sections 104-10 and 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: If, as a result of the reasonable apportionment, some amount is assigned to CGT event D1, should this amount be apportioned between you and your spouse? | A2: Yes | Q3: If, as a result of the reasonable apportionment, some amount is assigned to CGT event A1, should this amount be returned in the income year in which the farm land was sold (year ended 30 June 2010)? | A3: Yes | Q4: If, as a result of the reasonable apportionment, some amount is assigned to CGT event D1, should this amount be returned in the year in which the ECEG was received (year ended 30 June 2011)? | A4: Yes

Relevant facts and circumstances: You and your spouse operated a primary production business. The farmland was owned solely by you. The business was significantly affected by the continuing drought. You and your spouse decided to exit farming. The farmland was sold under a contract in the 2009-10 income year. Centrelink conducted a number of programs to entice farmers in financial difficulty to exit farming, one of which was the ECEG. The ECEG is cited in a Centrelink publication as being a one-off taxable payment of up to $150,000 for farmers who sold their farm enterprise. At the time of selling the property, you and your spouse made enquiries to Centrelink as to their eligibility for the ECEG. You submitted an application for the ECEG. An application for the ECEG does not allow for a joint application for spouses. A single applicant must be nominated and then the spouse's details are provided later in the form. The policy guidelines for the ECEG state that: It is a condition of the making of the EC Exit Grant that the applicant (and their partner, whether or not they remain a couple) who receives the grant must, by signing a statement, declare that they will not become an owner or operator of a farm enterprise within 5 years of exiting the farming industry based on the date of settlement of sale. The application was submitted in your name only; however your spouse also signed the declaration included in the application. The ECEG was approved during the 2010-11 income year and you subsequently received the payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-35 | Income Tax Assessment Act 1997 subsection 960-100(1)

Reasons for decision: Summary: CGT event D1 happens under section 104-35 of the ITAA 1997 'if you create a contractual right or other legal or equitable right in another entity.' Under subsection 960-100(1), an entity is defined as any of the following: (a) an individual; (b) a body corporate; (c) a body politic; (d) a partnership; (e) any other unincorporated association or body of persons; (f) a trust; (g) a superannuation fund. The Commonwealth is an entity for the purpose of CGT event D1. CGT event A1 happens under section 104-10 of the ITAA 1997 'if you dispose of a CGT asset'. Application to your circumstance A contractual right was created when an agreement was entered into with the Commonwealth under which a $150,000 ECEG was received in return for not becoming involved in an agricultural enterprise for at least five years. A D1 CGT event happened upon the signing of this agreement. However, it is also reasonable to conclude that where the individuals who received the ECEG also owned the assets of the business that were sold then some portion of the ECEG may relate to that original disposal. Under those circumstances part of the capital proceeds may pertain to the original A1 CGT event. Depending on your circumstances, it is appropriate that any capital gain in relation to the ECEG may be apportioned on a reasonable basis between CGT events D1 and A1. Note that in arriving at a reasonable apportionment you may wish to consider the extent to which the restrictive covenant will impact on you. Where you are at retirement age or are immediately embarking on an unrelated but long term career or employment opportunity it may be fair to conclude that very little, if any of the ECEG relates to the D1 CGT event. As you were the sole owner of the farm land, you are liable for the CGT on any capital gain that is apportioned to CGT event A1. CGT event D1 happens under section 104-35 of the ITAA 1997 'if you create a contractual right or other legal or equitable right in another entity.' (emphasis added) Application to your circumstance In this instance the restrictive covenant is created between the Commonwealth and both you and your spouse. It follows that the 'you' referred to in subsection 104-35(1) of the ITAA 1997 is a reference to both parties. Whilst the grant was made in your name only, this was as a result of the administrative practices of Centrelink. The application process was such that only one individual could apply on behalf of the relevant entity carrying on the primary production business. Despite this, the 'Exceptional Circumstances Exit Package 2007 Policy Guidelines' states the following: It is a condition of the making of the EC Exit Grant that the applicant (and their partner, whether or not they remain a couple) who receives the grant must, by signing a statement, declare that they will not become an owner or operator of a farm enterprise within 5 years of exiting the farming industry based on the date of settlement of sale. If you determine that some or all of the ECEG is received in relation to the D1 CGT event then it happens both to you and your spouse. Accordingly, the amount should be apportioned on a reasonable basis between you. Where a CGT A1 event occurs, subsection 104-10(3) of the ITAA 1997 provides that the time of the event is when you enter into the contract for the disposal. Application to your circumstance You state that the farm was sold under a contract in the 2009-10 income year. It follows that any capital gain apportioned to CGT event A1 and the original disposal will be included in the year ended 30 June 2010. For D1 CGT events subsection 104-35(2) of the ITAA 1997 provides that the time of the event is when you enter into the contract or create the other right. Application to your circumstance The right was created when you received a letter of approval in relation to the ECEG in the 2010-11 income year. It follows that any capital gain apportioned to CGT event D1 in relation to the five year restrictive covenant will be included in the year ended 30 June 2011.

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.