Private ruling: Income vs capital - exit deed
Date of advice: 8 September 2022
Published: December 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the payment received under the Exit Deed included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. The payment is not for the loss of income, nor is any part of it identifiable as income. The payment is considered a capital receipt received for the loss of your rights under the Agreement, and as such it is not assessable as ordinary income under section 6-5 of the ITAA 1997. | Q2: To the extent that the payment does not constitute assessable income in accordance with section 6-5 of the ITAA 1997, will it constitute capital proceeds under Division 116 of the ITAA 1997 in respect of CGT event C2 happening? | A2: Yes. CGT event C2 happened when you entered into the Exit Deed with Entity A. The amount received is the capital proceeds from the CGT event happening and a capital gain may arise. | Q3: To the extent that the payment does cause CGT Event C2 to happen will the intangible asset (rights under the Agreement) be considered to be an active asset under section 152-40 of the ITAA 1997? | A3: Yes. Your rights under the Agreement are intangible assets which were inherently connected with your business. As such, they are active assets under section 152-40 of the ITAA 1997.

Relevant facts and circumstances: You operated a business. You entered into an Agreement with Entity A under which you had rights to sell specific products and provide certain services for a specified period. Entity A advised you that they were restructuring their business operations and the Agreement was terminated before the end of the specified period. A dispute arose between you and Entity A with respect to the termination of the Agreement. You and Entity A have entered into an Exit Deed under which you and Entity A agreed to the settlement of all matters arising from or otherwise in connection with the Agreement ending, without any concession of liability by either party. Under the terms of the Exit Deed Entity A paid you an amount as compensation for the termination of the Agreement. You have not carried on any business since the date the Agreement was terminated.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 Division 116 | Income Tax Assessment Act 1997 section 152-40