Private ruling: Assessable income
Date of advice: 18 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is a lump sum paid to you to as a result of a settlement for Court proceedings assessable as ordinary income? | A1: No | Q2: Will the lump sum paid to you to as a result of a settlement for Court proceedings trigger a capital gains tax event? | A2: Yes | Q3: Can you apply the 50% discount to any capital gain made? | A3: Yes

Relevant facts and circumstances: You are a professional. You sued a company for copyright infringement as they used your work on a range of products without permission. You became aware that the products went on sale in 2014. You also sued as the company had breached their moral rights, engaged in misleading conduct in breach of Australian consumer law, and committed the tort of passing off. You reached a settlement after mediation in Court. A Deed of Settlement was entered between the parties in 2017.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5, | Income Tax Assessment Act 1997 section 100-40, | Income Tax Assessment Act 1997 section 102-20, | Income Tax Assessment Act 1997 section 104-25, | Income Tax Assessment Act 1997 section 108-5

Reasons for decision: Detailed Reasoning - Assessable Income: Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This 'ordinary income' includes amongst other things, income from salary and wages and business operations. Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, 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 compensation received by the taxpayer was not income from rendering personal services, income from property or income from carrying on a business. The payment is also a one off payment and thus it does not have an element of recurrence or regularity. A compensation amount generally bears the character of that which it is designed to replace. ( FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income. You received a lump sum payment for the loss of a capital asset; that is the right to seek compensation. The lump sum payment is a capital receipt and is not ordinary income. Therefore the compensation payment is not assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Capital gains tax: Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to an asset in which you have an ownership interest (section 102-20 of the ITAA 1997). A CGT asset is any kind of property; or a legal or equitable right that is not property (section 108-5 of the ITAA 1997). | Detailed Reasoning - CGT event: Compensation received as an un-dissected lump sum is treated as being consideration received for the disposal of the right to seek compensation. The right to seek compensation is a CGT asset. When you receive an amount of money as a result of a judgement from a court action or you receive an amount of money for settling your dispute out of court, you are disposing of an asset which is the right to seek compensation and a CGT event C2 occurs (section 104-25 of the ITAA 1997). In your case, a CGT event C2 occurred as there has been a release, discharge or satisfaction of the right, the date is when you signed the deed of settlement. For most CGT events the capital proceeds are the money you receive or are entitled to receive from the event (section 100-40 of the ITAA 1997). In your case, the capital proceeds are the total of the compensation you received. | Detailed Reasoning - 50% discount: A 50% discount may be applied to a discount capital gain realised by an individual. In order to be considered a discount capital gain, the asset that gave rise to the capital gain must have been owned for a period of at least 12 months prior to the CGT event. In your case, you identified that the products went on sale in 2014. You commenced legal action to seek compensation as a result of this. You have held the asset, which is the right to seek compensation for a period of more than twelve months prior to the C2 event occurring. Accordingly, the 50% discount can be applied.

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