House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 4 - Sugar industry exit grants

Outline of chapter

4.1 Schedule 4 to this bill amends the ITAA 1997 to specify the taxation treatment of sugar industry exit grants made under the Sugar Industry Reform Program. The amendments will:

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exempt from income tax sugar industry exit grants that are paid to taxpayers who leave the agricultural industry altogether; and

•

include in assessable income sugar industry exit grants that are paid to taxpayers who leave the sugar industry but continue to carry on another agricultural enterprise.

Context of amendments

4.2 On 10 September 2002 the Hon Warren Truss MP, Minister for Agriculture, Fisheries and Forestry, announced an assistance package for the Australian sugar industry.

4.3 The assistance package is part of a comprehensive Sugar Industry Reform Program that is designed to assist the sugar industry in the short term and to promote rationalisation of the industry to ensure its long-term economic, social and environmental sustainability.

4.4 One component of the Sugar Industry Reform Program is Commonwealth Government assistance for cane growers who wish to leave the sugar industry. The assistance consists of a one-off payment (a sugar industry exit grant) of up to $45,000 for growers who satisfy certain income and assets tests.

4.5 The recipient of a sugar industry exit grant must, as a condition of receiving the grant:

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execute a deed undertaking not to become an owner or operator of any agricultural enterprise within 5 years of receiving the exit grant (in which case the grant is exempt from income tax); or

•

execute a deed undertaking not to become an owner or operator of a sugar industry enterprise within 5 years of receiving the exit grant (in which case the grant is included in assessable income).

Summary of new law

4.6 The amendments will:

•

exempt from income tax sugar industry exit grants that are paid to taxpayers who execute a deed undertaking not to become an owner or operator of any agricultural enterprise within 5 years of receiving the grant; and

•

include in assessable income sugar industry exit grants that are paid to taxpayers who execute a deed undertaking not to become an owner or operator of a sugar industry enterprise within 5 years of receiving the grant.

4.7 The amendments will also ensure that income tax assessments can be amended if a taxpayer breaches an undertaking not to become an owner or operator of any agricultural enterprise or a sugar industry enterprise (as the case may be) within 5 years of receiving a sugar industry exit grant.

Detailed explanation of new law

4.8 A taxpayer who receives a sugar industry exit grant must, as a condition of receiving the grant:

•

execute a deed undertaking not to become an owner or operator of any agricultural enterprise within 5 years of receiving the exit grant; or

•

execute a deed undertaking not to become an owner or operator of a sugar industry enterprise within 5 years of receiving the exit grant.

What are the taxation consequences if the taxpayer undertakes not to become an owner or operator of any agricultural enterprise?

The sugar industry exit grant is exempt from income tax

4.9 A sugar industry exit grant paid under the Sugar Industry Reform Program is exempt from income tax if, as a condition of receiving the grant, the taxpayer executes a deed undertaking not to become an owner or operator of any agricultural enterprise within 5 years. [Schedule 4, item 5, section 53-10, item 4B in the table]

4.10 In addition, to ensure that the grant is not included in assessable income as a capital gain, any capital gain or capital loss made from a CGT event relating directly to a sugar industry exit grant paid under the Sugar Industry Reform Program is disregarded. [Schedule 4, item 8, paragraph 118-37(1)(f)]

4.11 The purpose of making sugar industry exit grants paid in these circumstances exempt from income tax is to provide additional assistance to cane growers whose business is no longer viable and who need help in making the transition to new employment.

Consequences of breaching the undertaking by re-entering the sugar industry

4.12 If a taxpayer breaches an undertaking not to become an owner or operator of any agricultural enterprise within 5 years and becomes an owner or operator of a sugar industry enterprise within that period, the sugar industry exit grant will be repayable to the Commonwealth. In most cases, no taxation consequences arise.

4.13 However, in these circumstances, once the taxpayer has repaid the sugar industry exit grant, section 59-30 will apply to ensure that the grant is not regarded as exempt income. Therefore, if the grant has been applied against a taxpayer's tax losses, he or she will be able to seek amendments to affected income tax assessments.

4.14 In this regard, subsection 170(10AB) of the ITAA 1936 generally allows the Commissioner to issue an amended assessment at any time to give effect to excluding an amount from a taxpayer's exempt income under section 59-30.

Consequences of breaching the undertaking by re-entering the agricultural industry (other than the sugar industry)

4.15 If a taxpayer breaches an undertaking not to become an owner or operator of any agricultural enterprise within 5 years and becomes an owner or operator of an agricultural enterprise (other than a sugar industry enterprise) within that period, the sugar industry exit grant will be included in the taxpayer's assessable income in the year it was received. [Schedule 4, items 4, 6 and 7, subsections 15-65(2) and (3), notes to section 53-10]

4.16 The Commissioner will be able to issue an amended assessment at any time to include a sugar industry exit grant in a taxpayer's assessable income under subsection 15-65(2). [Schedule 4, item 1, subsection 170(10AA), item 1A in the table]

What are the taxation consequences if the taxpayer undertakes not to become an owner or operator of a sugar industry enterprise?

The sugar industry exit grant is included in assessable income

4.17 A sugar industry exit grant paid under the Sugar Industry Reform Program is included in assessable income if, as a condition of receiving the grant, the taxpayer executes a deed undertaking not to become an owner or operator of a sugar enterprise within 5 years. [Schedule 4, item 4, subsection 15-65(1)]

4.18 However, to ensure that the grant is not included in assessable income as a capital gain, any capital gain or capital loss made from a CGT event relating directly to a sugar industry exit grant paid under the Sugar Industry Reform Program is disregarded. [Schedule 4, item 8, paragraph 118-37(1)(f)]

Consequences of breaching the undertaking by re-entering the sugar industry

4.19 If a taxpayer, in breach of an undertaking, becomes an owner or operator of a sugar industry enterprise within 5 years, the sugar industry exit grant will be repayable to the Commonwealth.

4.20 Section 59-30 will exclude the sugar industry exit grant from the taxpayer's assessable income when he or she repays the grant. [Schedule 4, item 4, note to section 15-65]

4.21 In this regard, subsection 170(10AB) of the ITAA 1936 generally allows the Commissioner to issue an amended assessment at any time to give effect to excluding an amount from a taxpayer's assessable income under section 59-30.

Application and transitional provisions

4.22 The amendments apply to sugar industry exit grants received on or after 1 February 2003. [Schedule 4, item 9]

Consequential amendments

4.23 To assist readers of the legislation, this bill inserts a reference to sugar industry exit grants in the checklists of assessable income and exempt income. [Schedule 4, items 2 and 3, sections 10-5 and 11-10]