Private ruling: Business exit payment
Published: June 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Does the business exit payment received by you form part of your assessable income? | A1: Yes.

Relevant facts and circumstances: You operated a business as a contractor. The business was conducted until business exit assistance was offered to affected participants in your industry. You qualified for an assistance payment and subsequently received a payment. The payment was calculated on the basis of the business' income less the purchase price of the produce. You signed deeds of release and indemnity in order to receive the payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(1) Income Tax Assessment Act 1997 Section 15-10 Income Tax Assessment Act 1997 Section 104-25 Income Tax Assessment Act 1997 Section 108-5

Reasons for decision: Summary: The payment received by you forms part of your assessable income as it is considered to be a capital gain as you have received the payment for surrendering your right to seek compensation from the payer. | Detailed Reasoning - Detailed reasoning: Payment as ordinary income 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). Ordinary income is not defined in the taxation legislation. The characteristics of ordinary income generally fall into three categories: · income from providing personal services · income from property, or · income from carrying on a business. Whether a particular receipt is ordinary income depends on the character in the hands of the recipient. In G P International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation [1990] HCA 25; (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1, 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 · 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 payment is made in consideration for you ceasing your business. It is payment for the surrender of a profit-yielding structure. The surrender is neither a normal incident of your business nor is the 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. 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 terms 'bounty' and 'subsidy' are not defined in income tax legislation. Following the decisions in The Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570, Reckitt and Colman Pty Ltd v. Federal Commissioner of Taxation (1974) 4 ATR 501; 74 ATC 4185 and First Provincial Building Society Ltd v. Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207 ( First Provincial ), it is accepted that a 'subsidy' or 'bounty' includes payments of financial assistance by 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 : 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 First Provincial : … 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 a 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 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 payment is in consideration for you ceasing all of your business. The payment is not directed at income earning activity and is not a bounty or subsidy in relation to the carrying on of a business for the purpose of section 15-10 of the ITAA 1997. Payment as a capital gain A capital gain or capital loss is made if a CGT event happens. For most CGT events, the capital gain is the difference between the capital proceeds and the cost base of the CGT asset. A capital loss is made if the reduced cost base of the CGT asset is greater than the capital proceeds. A right to seek compensation is a CGT asset under section 108-5 of the ITAA 1997. CGT event C2 under section 104-25 of the ITAA 1997 happens when the ownership of an intangible asset ends by the asset being satisfied or surrendered. The payment received by you was calculated on the basis of your business' income less the purchase price of the produce, and is therefore the capital proceeds for the satisfaction of your right to seek compensation. CGT event C2 happens when, pursuant to the deeds of release and indemnity, you surrender the right to seek compensation. The cost base is determined under Divisions 110 and 112 of the ITAA 1997. It includes any cost of applying for the payment. The market value of the right to seek compensation is not included as part of the cost base as the market valuation rules do not apply to the acquisition of the right to seek compensation in your case. Any capital gain cannot be reduced by the general CGT discount as the capital gain will not result from a CGT event happening to a CGT asset that was acquired by you at least 12 months before the CGT event happened. Any capital gain may be reduced or deferred by the small business CGT concessions if the requirements in Division 152 of the ITAA 1997 are satisfied. There is no provision in the ITAA which would exempt any capital gain made.

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