CGT Dairy industry deregulation: small business concessions - active asset - payment right

Is a dairy structural adjustment program (DSAP) payment right an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. A DSAP payment right is not an active asset under section 152-40 of the ITAA 1997?

The Australian dairy industry was deregulated on 1 July 2000. Deregulation involved, among other things, Commonwealth legislation which provided for 2 types of payments to dairy farmers as follows: • dairy structural adjustment program (DSAP) payments - being quarterly payments receivable over an 8 year period. • dairy exit payments - available for farmers who chose to leave agriculture.

With respect to the DSAP payments, farmers were granted a DSAP payment right of a certain value based on their past production, entitling them to a future stream of payments. The payment rights are transferable.

For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997 it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset at a particular time if, at that time, it is owned and used (or held ready for use) by a taxpayer or certain related entities in the course of carrying on a business or is an intangible asset that is inherently connected with a business that the taxpayer carries on.

However, paragraph 152-40(4)(d) of the ITAA 1997 provides that an asset that is a financial instrument cannot be an active asset.

A DSAP payment right has features that are characteristic of other financial instruments such as a face value, a discounted present value, an income stream and tradeability and fits within the concept of a financial instrument.

A DSAP payment right is therefore not an active asset under section 152-40 of the ITAA 1997. The small business CGT concessions contained in Division 152 of the ITAA 1997 will not apply to any capital gain made on a disposal of a DSAP payment right. Note: The CGT discount in Division 115 of the ITAA 1997 may apply to a capital gain made on a disposal of a DSAP payment right if it was acquired at least 12 months before its disposal and the other conditions are satisfied.