Private ruling: Exceptional circumstances exit grant
Published: June 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the exceptional circumstances farm exit support grant (ECEG) assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is the ECEG assessable as a bounty under section 15-10 of the ITAA 1997? | A2: No. | Q3: Do the capital gains tax (CGT) provisions apply to the ECEG? | A3: Yes. | Q4: Should the ECEG be apportioned on a reasonable basis between CGT events A1 and D1 under sections 104-10 and 104-35 of the ITAA 1997 respectively? | A4: Yes. | Q5: For the purposes of 152-12 of the ITAA 1997, will the portion of the capital gain pertaining to the D1 event satisfy the meaning of active asset? | A5: Yes. | Q6: Are you entitled to apply the retirement exemption in Subdivision 152-D of the ITAA 1997 to the capital gain? | A6: Yes.

Relevant facts and circumstances: You owned a piece of farm land with your spouse. You did not hold equal shares in the land. Part of the ownership interest in the land was acquired pre-CGT. You conducted a farming business as a partnership with your spouse using the land. You sold the land as the farming business was not viable. You received an ECEG from the Commonwealth. The application for the grant was submitted in your name. The full amount of the grant was paid directly to you. The condition arising from the ECEG is that an applicant cannot become an owner or operator of an agricultural enterprise again within five years. A pre-condition before applying for the ECEG is that an applicant must have already sold their farm land. You are a partner in a partnership that is a small business entity. The farm land sold satisfied the active asset test

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 15-10 | Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 115-25(3) | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-12 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 subdivision 152-D | Income Tax Assessment Act 1997 subdivision 152-305 | Income Tax Assessment Act 1997 section 960-100(1)

Reasons for decision: Summary: Subsection 6-5(1) provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). However, as there is no definition of ordinary income in income tax legislation, it is necessary to apply principles developed by the courts to the facts of a particular case. A generally decisive consideration is whether the payment is the product in a real sense of any employment, services or business carried on by the recipient. A payment that is provided for a purpose which is not part of the recipient's business will not constitute ordinary income. In your case, the receipt of your ECEG is neither a normal incident of your business nor provided in relation to the purpose for which your business was carried on. The receipt was a direct result of your having sold your land and associated property, and agreeing not to carry on a business of primary production within five years of the payment date. It follows that the ECEG does not constitute ordinary assessable income under section 6-5. Section 15-10 provides that an amount is included in assessable income if it is a bounty or subsidy received in relation to carrying on a business which is not already caught as ordinary income under section 6-5. In accordance with TR 2006/3, 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' includes within its scope payments that have a direct or indirect connection to the business. However, a bounty or subsidy must be related to carrying on the business not merely for commencing or ceasing a business. Therefore, Government payments to industry received by an entity as assistance either to cease a business or give or sell part of the profit yielding structure of the business are not in relation to the carrying on of the business. In your case, the receipt of your ECEG is neither a normal incident of your business nor provided in relation to the purpose for which your business was carried on. The receipt was a direct result of your having sold your land and associated property. Therefore, it is not a bounty or subsidy in relation to the carrying on of a business for the purposes of section 15-10. Accordingly, no part of the total receipts constitutes assessable income under section 15-10. The land is a CGT asset in terms of section 108-5. In accordance with the Commonweath's eligibility requirements the ECEG was made directly in relation to the disposal of the underlying CGT assets to which it relates. In your case that is the farm land. Therefore, it is treated as part of the capital proceeds for the disposal of this asset. As you entered into a restrictive covenant not to operate a primary production business for five years it follows that CGT event A1, and also possibly CGT event D1 happened when the ECEG was paid to you. As such, this amount is to be included in your assessable income as a capital gain under Division 104 CGT event D1 happens under section 104-35 '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 'if you dispose of a CGT asset'. A contractual right was created when an agreement was entered into with the Commonwealth under which an 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 partners 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. 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 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 your case, you are a small business entity and as discussed above, CGT event D1 happened upon the signing of the agreement. The land sold satisfied the active asset test. Therefore, the right created is considered inherently connected with a CGT asset of yours that satisfies the active asset test. Subdivision 152-D provides a small business CGT concession known as the small business retirement exemption. Under section 152-300 you can choose to disregard a capital gain from a CGT event happening to a CGT asset of your small business if the capital proceeds from the event are used in connection with your retirement and you satisfy the basic conditions. If you are under 55 years old just before you choose to use the retirement exemption, you must make a personal contribution equal to the exempt amount to a complying superannuation fund. The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit. An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. In your case, you were over 55 years of age at the time of the CGT event and you satisfy the basic conditions for small business relief (as discussed in question 5), the retirement exemption is available to you as long as you do not exceed the CGT retirement exemption limit

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 ITAA 1997.