Private ruling: A payment at the termination of a deed
Published: February 2013
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Were the payments made at the termination of the deed capital payments? | A1: No. | Q2: If the payments were capital, is the relevant time of the capital gains tax event when the deed terminated? | A2: Not applicable. | Q3: If the payments were capital, is the 50% general discount available? | A3: Not applicable. | Q4: If the payments were capital, do they qualify for the small business capital gains tax concessions? | A4: Not applicable.

Relevant facts and circumstances: The partnership of A Family Trust and B Family Trust run a business. This business distributes supplies on behalf of a large manufacturer. The partnership entered into a Deed with the manufacture for a set period of time. In accordance with the terms of the Deed, a termination payment was payable to the partnership at the time the Deed terminated. The Deed provides that this termination payment is to be calculated with reference to sales commissions received by the partnership. The termination payment is provided as consideration for the partnership not providing certain distribution services for several months from the date of expiry of the Deed. The payments were paid in several equal monthly amounts. The partnership has entered into another distribution deed. This new deed provides that the distribution relationship will continue between the two parties, but on different terms. The different terms do not allow the partnership to generate the same level of profit as was possible under the previous deed.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5.

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). Ordinary income has generally been held to include 3 categories, namely income from rendering services under a contract, 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; · are relied upon; and · have an element of periodicity, recurrence or regularity. The presence or absence of any single indicator is not necessarily determinative as to whether or not a particular payment is income. Payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433). | Detailed Reasoning - Application to your circumstances: In this case upon termination of the deed payments were made to the partnership in several equal instalments. It is considered that the payments had an element of recurrence or regularity given they were received by the partnership on a monthly basis. The payments were also expected, and perhaps relied upon, as they were paid to the partnership in accordance with a clause set out in the original deed entered into by the parties. As per the deed, the payments were calculated with reference to the sales commissions received by the partnership during the final X months of the arrangement. These sales commissions would have been assessable income in the hands of the partnership. It is considered that the several payments received by the partnership were designed to substitute the partnership's monthly sales commissions. Therefore, the payments are assessable as ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Question 2, 3 & 4: As the payment received is considered assessable as ordinary income, it will not be a capital amount. Therefore, it is not necessary to consider the general discount or the small business capital gains tax concessions as they are not applicable.

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