Private ruling: Lump sum compensation payment - Farm management deposit
Date of advice: 20 February 2026
Published: 7 April 2026
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the Payment you received under the Scheme attributable to probable Loss of Income assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is the Payment you received under the Scheme assessable income under section 15-10 of the ITAA 1997? | A2: No. | Q3: Is any portion of the Payment attributable to the loss of fishing rights or business value a capital receipt, subject to capital gains tax (CGT) under Division 104 of the ITAA 1997? | A3: No. | Q4: Is any portion of the Payment exempt under section 118-37 of the ITAA 1997 as compensation for loss or damage to business operations, akin to an insurance payment? | A4: No. | Q5: Will an amount withdrawn from your farm management deposit (FMD) be assessable income in the financial year it is withdrawn? | A5: Yes.

Relevant facts and circumstances: After environmental and endangered species research and reports, fisheries legislation was amended to cancel particular licence types. A Scheme was established to provide assistance to fishers with eligible licences who are affected by the cancellation of those licences, and the closure of particular commercial fisheries. The Scheme is administered by a government authority. The objectives of the Scheme are: • to provide assistance to commercial fishing licence holders if they are affected by the closure • to encourage eligible licence holders to surrender the affected licence • to provide assistance to affected licence holders to replace income the holder would have been projected to earn from fishing in the closed fisheries in the following few years. • to provide assistance to holders of affected licences to seek legal or financial advice about the scheme. The legislation provides information about the payments for loss of income including the nature of the assistance, formulas for calculating the amount of assistance, and the eligibility criteria for receiving assistance. Guidelines for the Scheme were published by the administering government authority on their website. The Scheme Guidelines state that eligible applicants can apply for assistance for payments for loss of income, among others, under the Scheme: The Scheme Guidelines provide further information about payments for loss of income. They state that the purpose of the assistance given to an applicant under this section [payments for loss of income] is a payment of an amount worked out based on the applicant's fishing history in the particular region and the projected price of fish in following the fishery licence cancellation. You are a commercial fisher affected by the Scheme. You held a commercial fishing licence prior to the fishery closure licence cancellation. You received a letter from the relevant government department informing you that you were identified as having held a licence which was being impacted by the legislative closures and cancellations. The letter informed you that applications for loss of income payments were now available, and provided you with an estimate of the payment you could receive which was calculated using reliable information showing you reported catch for a period, and multiplying it by a price multiplier. The letter stated that separate letters will outline payment estimates for retired and impacted licences. You received a grant for getting advice related to the Scheme. You submitted an application for the probable loss of income to the government authority. You received a letter of offer from the government authority offering you a financial assistance payment pursuant to the Scheme with a total value equal to the earlier estimate. The letter states that the Assistance is provided to you pursuant to the Scheme as compensation for: Loss of income. You then received the lump sum payment (the Payment) from the government authority. You were granted a temporary licence, which permits fishing with your existing equipment for three years until the licence automatically retires. By accepting the temporary licence, you became ineligible for other Scheme components. Information about your fishing activities using the temporary licence: • You earned a profit from your fishing trips. • You could not go fishing until the temporary licence was distributed and the regulations being drafted were completed. You also had to wait for special equipment to be installed, per compliance requirements. • During the time that you could not fish, you did repairs and maintenance of both the car and the fishing vessel, and you were completing documentation and book work, and attending meetings for new fishing strategies in light of the changes. • You caught Xkg of fish. In a relevant year you worked for 8 months of the year and caught a minimum of Xkg of fish per month. These are conservative estimates based on your logbook entries and any sales records. • You were bound by the regulations, and by closure periods. • To meet compliance standards, you faced time consuming regulatory checks and paperwork, increased vessel safety preparation and maintenance, increased time on the water, increased safety risks and increased operational costs, which made some fishing trips unviable. • Viable fishing grounds were reduced. • Your catch was affected by weather, seasonal factors and declining market prices. • You do not have a formal written business plan or a detailed annual budget. You manage the operation informally on a month-to-month basis, with decisions driven by immediate viability rather than long-term planning. You maintain the minimum records required for licencing and compliance. • When you have a good catch you send it through a large fish market. You do not have formal contracts or regular commercial arrangements due to the unpredictable volumes. You deposited money in a Farm Management Deposit (FMD) after receiving the lump sum payment. You claimed a deduction equal to the deposited amount in your income tax return. More than 12 months later you withdrew money from your FMD. You intend to withdraw the remaining funds from your FMD. You are experiencing overall uncertainty and economic unviability.

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 104-25 | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 section 118-37 | Income Tax Assessment Act 1997 subdivision 393-A | Income Tax Assessment Act 1997 subdivision 393-B | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: The Payment you received for loss of income is assessable as ordinary income under section 6-5 of the ITAA 1997 in the income year in which it was derived. | Detailed Reasoning - Detailed reasoning: Ordinary income Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has been held to include income from providing personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: • are earned • are expected or relied upon • have an element of periodicity, recurrence or regularity • replace income. Generally, a compensation amount bears the character of that which it is designed to replace. If the compensation is paid for the loss of income, then it will be regarded as ordinary income. If the compensation is paid for the loss of a capital asset or amount, then it will be regarded as a capital receipt and not ordinary income. Paragraph 85 of Taxation Ruling 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business (TR 2006/3) provides additional factors from case law which are to be considered in determining the nature of a receipt. Of relevance: • The nature of a payment is determined by examining the character of the payment in the hands of the recipient. • A payment in a lump sum does not require a conclusion that the payment is capital. • The calculation of a payment by reference to expected profits made, or not made by the recipient but that would ordinarily be expected to have been made, is a factor supporting the conclusion of income. Paragraph 11 of TR 2006/3 states: A GPI [government payment to industry] to assist a business to continue operating, except where the payment is for agreeing to give up or sell part of the profit yielding structure, is included as assessable income of the recipient under section 6-5 or section 15-10. And paragraph 14 of TR 2006/3 states: A GPI [government payment to industry] for loss of profits because of government policy or industry restructure is assessable under section 6-5 in the income year in which it is derived. This includes where loss of profit is calculated with regard to factors that are not readily identifiable with the reason for the payment (for example, if calculated by an anticipated or estimated loss or diminution in value of plant or equipment). These paragraphs of TR 2006/3 make it clear that a government payment to provide income support because of an actual or expected reduction in business income is ordinary income in the hands of the recipient and assessable under section 6-5. | Detailed Reasoning - Application to your circumstances: In this case, the Payment you received from the government was explicitly stated to be compensation for loss of income in the letter of offer. The amount of the Payment you received was calculated using the formula provided in the legislation and was based on your fishing history, specifically your average annual catch during the relevant period, multiplied by the projected price of fish. As the Payment was specifically provided to you under the loss of income part of the Scheme, and was calculated by reference to the money you would ordinarily have been expected to earn following the cancellation of your fishery licence, it bears the character of the that which it was designed to replace, which is ordinary income. Therefore, it is assessable under section 6-5. | Detailed Reasoning - Question 2: 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, and • not assessable as ordinary income under section 6-5. In your case, the Payment is assessable as ordinary income under section 6-5, this means that it cannot be included in your assessable income under section 15-10. | Summary: Any capital gain made when you received the Payment is reduced to zero by the operation of section 118-20 of the ITAA 1997. No portion of the Payment is a capital receipt attributable to the loss of fishing rights or business value. | Detailed Reasoning - Detailed reasoning: CGT event C2 happens under subsection 104-25(1) of the ITAA 1997 if a taxpayer's ownership of an intangible CGT asset ends because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. You make a capital gain from CGT event C2 if the capital proceeds from the asset ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. Subsection 118-20(1) of the ITAA 1997 provides that a capital gain you make from a CGT event is reduced if, because of the event, a provision of the Act includes an amount in your assessable income. The capital gain is reduced to zero if it does not exceed the amount included in your assessable income. In your case, CGT event C2 happened when you received the Payment. This is because the right to receive the Payment is an intangible asset, and when you received the Payment, you gave up that right. The capital gain from that C2 event would be the full amount of the Payment. However, because the full amount of the Payment is included in your assessable income under section 6-5 of the ITAA 1997 (as explained in question 1), any capital gain that you made from CGT event C2 occurring is reduced to zero under section 118-20 of the ITAA 1997. | Summary: No, no portion of the payment is exempt under section 118-37 of the ITAA 1997, and any capital gain made when you received the Payment is already reduced to zero by the operation of section 118-20 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Paragraph 118-37(2)(a) of the ITAA 1997 provides a CGT exemption by disregarding a capital gain or capital loss that results from receipt of a payment as reimbursement or payment of expenses, or receiving or using a voucher or certificate, under a scheme established under legislation by an Australian government agency. In your case, the operation of section 118-37 of the ITAA 1997 to disregard a capital gain is not necessary, because any capital gain made when you received the payment is already reduced to $0 by the application of section 118-20 of the ITAA 1997 (as explained in question 3). In addition, the Payment you received is not classified as a reimbursement or payment of your expenses, nor is it characterised as a voucher or certificate. Rather, it is a payment for projected loss of income. This means that paragraph 118-37(2)(a) of the ITAA 1997 would not apply. | Summary: Yes, the amounts withdrawn from your farm management deposit for any purpose will be assessable income in the financial year they are withdrawn. | Detailed Reasoning - Detailed reasoning: The farm management deposits (FMD) scheme can help primary producers deal with years of varying income. When you deposit an amount into an FMD account, you can claim a tax deduction for that amount under certain conditions. Then when you withdraw from that account, the amount withdrawn is assessable income in that year it is withdrawn. The conditions for claiming a tax deduction for the full amount deposited in an FMD include: • the deposit amount must not be more than your taxable primary production income for the income year • the deposit amount must not cause your total FMD account balances to be more than $800,000 • no amount can be withdrawn from the FMD account within 12 months of depositing (unless an exception occurs). Section 393-10 of the ITAA 1997 prescribes the amount which must be included in your assessable income when you withdraw from your FMD. In general, where you claimed a tax deduction for the full amount when you made the deposit into an FMD account, then the full amount you withdraw is assessable income in the year you withdraw it. However, there is an exception to this general rule where an amount in an FMD becomes a deemed repayment. In this case the amount is assessable income in the year it is deemed to be repaid rather than the year it is actually withdrawn. An amount is a deemed repayment where the owner of the FMD becomes bankrupt or dies, or where the owner of the FMD stops carrying on their primary production business for more than 120 days. According to section 995-1 of the ITAA 1997, you carry on a primary production business if you carry on a business of 'conducting operations relating directly to catching fish'. Taxation Ruling 97/11 (TR 97/11) provides the following indicators of carrying on a business of primary production at paragraph 13: • whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators • whether the taxpayer has more than just an intention to engage in business • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity • whether there is repetition and regularity of the activity • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation or a sporting activity. No one indicator is decisive, and whether a business is being carried on depends on the large or general impression gained. | Detailed Reasoning - Application to your circumstances: You made a deductible deposit into an FMD, and you claimed a deduction for the full amount in your income tax return. More than 12 months later you withdrew an amount from your FMD. As this was more than 12 months after your original deposit, it did not make any amount of your FMD non-deductible. You intend to withdraw the remaining amount from your FMD account. From when you first deposited in your FMD account until now, the overall impression gained from your activities is that you were and are carrying on a primary production business throughout the period. An analysis of your situation against the factors in TR 97/11 shows that although your fishing activities have been affected by the cancellation of the fishery licence and the introduction of the temporary fishery licence and its additional compliance requirements, you continued carrying on a fishing business with some altered activities due to the regulations placed on you. Based on the information provided we accept that you did not cease your primary production business for more than 120 days, and therefore there were no deemed repayments of your FMD. Therefore, because you were able to claim a deduction for the full amount deposited in your FMD account in that financial year, and no deemed repayments of you FMD have arisen, the amounts you already withdrew from your FMD account are assessable income in that financial year, and any amounts you withdraw in the future are assessable income in the financial year they are withdrawn. The income tax legislation does not place any restriction on what amounts withdrawn from an FMD may be used for.