Batchelor v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 442 of 2013)
Judgment date: 3 April 2014
Date published: 27 September 2016

Summary of decision:
This case concerns whether an amount received by the taxpayer in accordance with a settlement deed, that was in consequence of the settlement of a dispute concerning a failed development of a retirement village, was an assessable recoupment under section 20-20 of the Income Tax Assessment Act 1997 (ITAA 1997) or an assessable capital gain under Part 3-1 of the ITAA 1997.

Overview of facts:
The taxpayer held an interest in the business and assets of the Cresthaven Village Partnership (the Partnership) through an interest in TPC Retirement Nominees (No 2) Pty Ltd, a party to the Partnership. | In June 1999, GDK Retirement Nominees (Cresthaven) Pty Limited (Cresthaven), acting as a bare trustee of the Partnership, entered into a contract (the Contract) with Prime Life (Mount Evelyn) Pty Ltd for the purchase and development of a property to be known as the Cresthaven Retirement Village. Pursuant to that contract, a deposit of $6.5 million was paid by Cresthaven. The taxpayer's share of that deposit was $55,500 (the Deposit). | In the tax return for the 1999 income year, the taxpayer claimed a deduction for the Deposit. | In 2004, through separate proceedings involving Cresthaven, settlements were reached between the various parties. As a result of the settlements, the taxpayer received a sum of $47,927 (the Receipt). | In February 2008, the amount of $47,927 was not returned as assessable income by the taxpayer in her tax return for the 2007 income year. | On 27 June 2011, the Commissioner issued a notice of amended assessment to the taxpayer for the 2007 income year, including an amount of $47,927 in the taxpayer's assessable income. The taxpayer objected and the Commissioner disallowed the taxpayer's objection in full. | The taxpayer applied to the Administrative Appeals Tribunal for a review of the objection decision. The AAT found that the amount of $47,927 should be included in the taxpayer's assessable income under section 20-35 of the ITAA 1997 because the amount satisfies the requirements of being an assessable recoupment under subsection 20-20(2) of the ITAA 1997, or in the alternative, it was nevertheless assessable as a capital gain under Part 3-1 of the ITAA 1997 (with subsection 110-45(2) of the ITAA 1997 applying to exclude the Deposit from the cost base calculation). | These issues were raised before the Full Federal Court. | Issues decided by the court | There were two main income tax issues before the Full Federal Court. | The first issue was whether the Receipt should be characterised as an assessable recoupment within the meaning of subsection 20-20(2) of the ITAA 1997. In particular, whether the taxpayer received the amount 'by way of insurance or indemnity' as required by paragraph 20-20(2)(a) of the ITAA 1997. | On this issue, Edmonds and Pagone JJ [at 16] concluded that: It follows that the amount ought not to have been included in the taxpayer's assessable income under s 20-20(2) and, therefore, that it is not necessary to deal with the other issues which had been raised by the parties on the appeal, although it may be desirable to consider the Commissioner's alternative argument which had also found favour with the Tribunal, namely, that the amount was taxable as a capital gain. | Justice Wigney [at 26] agreed with the finding of Edmonds and Pagone JJ that the relevant receipt could not properly be characterised on the material before the Tribunal as a receipt 'by way of insurance or indemnity'. | The second issue, in the alternative, was whether the Deposit forms part of the cost base of the capital gains tax calculation if the Receipt is characterised as an assessable capital gain under Part 3-1 of the ITAA 1997. The Court did not form a concluded view on this issue.

Issues decided:
There were two main income tax issues before the Full Federal Court. The first issue was whether the Receipt should be characterised as an assessable recoupment within the meaning of subsection 20-20(2) of the ITAA 1997. In particular, whether the taxpayer received the amount 'by way of insurance or indemnity' as required by paragraph 20-20(2)(a) of the ITAA 1997. On this issue, Edmonds and Pagone JJ [at 16] concluded that: It follows that the amount ought not to have been included in the taxpayer's assessable income under s 20-20(2) and, therefore, that it is not necessary to deal with the other issues which had been raised by the parties on the appeal, although it may be desirable to consider the Commissioner's alternative argument which had also found favour with the Tribunal, namely, that the amount was taxable as a capital gain. Justice Wigney [at 26] agreed with the finding of Edmonds and Pagone JJ that the relevant receipt could not properly be characterised on the material before the Tribunal as a receipt 'by way of insurance or indemnity'. The second issue, in the alternative, was whether the Deposit forms part of the cost base of the capital gains tax calculation if the Receipt is characterised as an assessable capital gain under Part 3-1 of the ITAA 1997. The Court did not form a concluded view on this issue.

ATO view of decision:
The ATO agrees with the Court's finding that, in light of the way the case was conducted before the Tribunal and based on the material before the Tribunal, the Receipt could not properly be characterised as a receipt 'by way of insurance or indemnity' for the purposes of paragraph 20-20(2)(a) of the ITAA 1997. | The ATO notes that the Court did not form a concluded view on the second issue. | As the decision was primarily centred around whether the taxpayer received the amount 'by way of insurance or indemnity' as required by paragraph 20-20(2)(a) of the ITAA 1997, the decision will have no impact on the now withdrawn TR 94/24. | In line with the decision, the Commissioner will withdraw ATO ID 2009/119 Income Tax: Refund of deposit: received by a purchaser as an assessable recoupment.

Administrative treatment:
Implications for impacted ATO precedential documents (Public Rulings, Determinations, ATO IDs) | ATO ID 2009/119 is withdrawn effective from 3 April 2014, following the decision in this case. The ATO ID contains a view inconsistent with the decision handed down and will not be replaced. | Implications for impacted Law Administration Practice Statements | Nil. | Date of amendment Part Comment 27 September 2016 Administrative treatment Updated to reflect the withdrawal of ATO ID 2009/119

Legislative references: Income Tax Assessment Act 1997 section 26-47
Case references: Batchelor and Commissioner of Taxation [2013] AATA 93 2013 ATC 10-297 Birdseye v Australian Securities and Investment Commission (2003) 38 AAR 55 Briers v Atlas Tiles Ltd (1978) 8 ATR 176 78 ATC 4017 CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd [2004] VSCA 232 Comcare v Fiedler (2001) 115 FCR 328 Commercial Banking Company of Sydney Ltd v Federal Commissioner of Taxation (1983) 70 FLR 433 83 ATC 4208 Commissioner of Taxation v Energy Resources of Australia (2003) 135 FCR 346 Commissioner of Taxation v Malouf [2009] FCAFC 44 (2009) 174 FCR 581 (2009) 75 ATR 335 2009 ATC 20-099 Federal Commissioner of Taxation v Glennan (1999) 90 FCR 538 (1999) 41 ATR 413 99 ATC 4467 Federal Commissioner of Taxation v Raptis (1989) 20 ATR 1262 89 ATC 4994 Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266 (1997) 35 ATR 432 97 ATC 4317 Federal Commissioner of Taxation v Wade (1951) 84 CLR 105 (1951) 9 ATD 337 Foran v Wright (1989) 168 CLR 385 Goldsbrough Mort & Co Ltd v Federal Commissioner of Taxation (1976) 14 SASR 591 76 ATC 4343 (1976) 6 ATR 580 Liftronic Pty Ltd v Unver (2001) 179 ALR 321 [2001] HCA 24 Macnamara v Martin (1908) 7 CLR 699 Mendelsons Lawyers Pty Ltd v Hanlon [2013] VSC 320 Nudd v R (2006) 225 ALR 161 [2006] HCA 9 Perpetual Trustee Co (Canberra) Ltd v Commissioner for ACT Revenue (1994) 50 FCR 405 94 ATC 4403 (1994) 28 ATR 307 Rabelais Pty Ltd v Cameron (1995) 95 ATC 4552 Repatriation Commission v Warren (2008) 167 FCR 511 Robert v Collier's Bulk Liquid Transport Pty Ltd [1959] VR 280 Van Gervan v Fenton (1992) 175 CLR 327 Vincent v Commissioner of Taxation (2002) 124 FCR 350 Williamson v Commissioner for Railways [1960] SR (NSW) 252