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Is the payment of $X each to A and B assessable as a capital gain under section 102-5 or as ordinary income under section 6-5 of the ITAA 1997?

No. This ruling applies for the following period : 30 June 20YY

A and B are beneficiaries of the Trust and parties to the Deed which regulates the relationship between the beneficiaries of the Trust. Consistent with clause X, both A and B assigned part of their interest in the income and capital of the Trust to C by entering into deeds of assignment of interest. The deeds of assignment effected a disposal by A and B of parts of their interest in the Trust to C. A condition to the assignment was that if an event occurred within X years of the Deed being entered into, A and B were entitled to receive payment from C. An event occurred within X years and A and B each received a payment of $X from C.

Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 102-5 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 104-25 Income Tax Assessment Act 1997 section 104-55 Income Tax Assessment Act 1997 section 108-5 Does IVA apply to this private ruling? Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. We have not ful

All legislative references in these reasons for decision are to provisions in the Income Tax Assessment Act 1997 unless specified otherwise. Capital Gain Subsection 102-25(1) provides that if more than one capital gains tax (CGT) event can happen, the one you use is the one that is the most specific to your situation. Section 102-5 provides that you include the net capital gain in your assessable income. Section 104-10 provides that CGT event A1 happens if you dispose of a CGT asset. Section 104-55(1) provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. Section 108-5 provides that a capital gains tax asset is any kind of property, or a legal or equitable right that is not property. Disposal is defined in subsection 104-10(2) to have happened when there is a change of ownership. The type of change that is relevant will depend on the type of ownership the holder of the CGT asset has and what the purported acquirer obtains, for example, whether their ownership is recognised at law or in equity.

A and B are beneficiaries of the Trust and are parties to the Deed which effects the relationship between the beneficiaries of the Trust. Consistent with clause X, both A and B assigned part of their interests in the income and capital of the Trust to C by entering into deeds of assignment of interest. These assignments caused CGT events A1 and more specifically E1 to occur as A and B both began to hold the assigned part of their Trust interest for the benefit of C. A condition to the assignment was that if an event occurred within xx years of the Deed being entered into, A and B were entitled to a payment. This right to receive payment if an event occurred was an intangible CGT asset that comprised part of the capital proceeds A and B received when they assigned part of their Trust interest to C. Its cost base was its market value at the time it was received. Section 104-25 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends because the asset (right) expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited (subsection 104-25(1)).

CGT event C2 happened when A and B's ownership of the intangible asset (the right to receive payment if an event occurred within xx years) came to an end because that right was realised and they were paid by C. We have decided it is reasonable to conclude that the proceeds from this CGT event C2 happening are not more than the cost base of this right i.e. its market value when received by A and B. Therefore, A and B will not make any capital gain or loss in respect of the payment of approximately $X each. Ordinary income Section 6-5 states: 6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income. 6-5(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. 6-5(3) If you are a foreign resident, your assessable income includes: (a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and (b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

6-5(4) In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct Section 6 includes in assessable income those receipts which can be categorised as income according to ordinary concepts. Income according to ordinary concepts is not defined in the tax laws. However, there is a substantial body of case law from which a number of factors have been drawn which indicate whether an amount has the character of income according to ordinary concepts (ordinary income). A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity, even if the receipts are not directly attributable to services rendered. The payment of $X is not considered to be income according to ordinary concepts as it lacks these characteristics. The payment is not ordinary income and is therefore not assessable under section 6-5. The payment of approximately $X each to A and B will not be a capital gain assessable under section 102-5, nor will it be assessable as ordinary income under section 6-5.