Private ruling: Lump sum - capital gains tax
Date of advice: 22 January 2026
Published: 16 March 2026
Ruling period: Year ended 30 June 20XX
Date scheme commenced: XX XXXX 20XX

Ruling: Q1: Is the compensation payment you will receive under the deed of settlement assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is the payment considered a capital gain? | A2: Yes. | Q3: Should the payment be deemed a capital gain, will you be able to access the 15-year CGT concession that you would have been eligible for had you been paid correctly at the time of your exit? | A3: No.

Relevant facts and circumstances: On XX XXX 20XX, Company A was incorporated. You were appointed as the Company A's initial director and secretary and held all ordinary shares issued initially in the Company. By XX XXX 20XX, the number of shares you held in Company A were reduced to XX of the total ordinary shares after issuing them to staff. On XX XXX 20XX, you were still the sole director of the Company A. In or around XX XXX 20XX, as a result of matters stated to you by the Company's then solicitor Person A, you signed a letter addressed to yourself as the Company's secretary resigning as a director and secretary of the Company with effect from XX XXX 20XX and a non-standard Share Transfer Form by which you purported to transfer your ordinary shares in the Company to Person B for consideration. With effect from XX XXX 20XX, the defendants, which included Person B were appointed as directors of Company A. On XX XXX 20XX, you received a valuation of the value of your shares in the Company as of XX XXX 20XX in the sum of $XX. On or around XX XXX 20XX, the defendants caused a Form 484 to be lodged with the Australian Securities and Investments Commission advising of the transfer of your ordinary shares to Person B. On or around XX XXX 20XX, Person A sent an email to your then solicitor attaching the Company's financial statements for the year ended 30 June 20XX and a dividend statement dated XX XXX 20XX providing dividends in respect of the ordinary shares held by you in the Company were declared and paid in the sum of $XX, being a franked dividend of $XX and an imputed credit of $XX. You then received payment of the dividend of $XX from the Company A. The payment of the dividend was diluted by the value of the Company, and you did not receive the full value of what you believed the shares were worth according to your valuation. You will enter a deed of settlement with the defendants and receive a lump sum in settlement of all claims. The lump sum payment will wholly discharge the defendants from any and all claims relating to or connected with or arising out of the transfer of your ordinary shares in the Company to Person B and your resignation as a director of the Company. You will sign and execute the deed of settlement in the 20XX income year. You will receive the lump sum payment in the 20XX income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 paragraph 108-5(1)(b) | Income Tax Assessment Act 1997 division 115 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subdivision 152-B | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Summary: Accordingly, the compensation payment is not ordinary income and is therefore not assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; (1952) 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. Federal Commissioner of Taxation 79 ATC 4641; (1979) 10 ATR 411). Lump sum damages may be a claim made up of several items, some being of a revenue nature and others of a capital nature. If different components of a lump sum compensation payment can be identified, those components that are of an income nature, such as those to compensate for loss of income, are assessable. Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. TD 93/58 states that where the compensation payment is for loss of income, the amount is assessable as ordinary income and where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable. Based on case law, it can be said that ordinary income generally includes receipts that: • are periodical, regular or recurrent; • are relied upon by the recipient for their regular expenditure and paid to them for that purpose; and • are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient. Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts provides the Commissioner's view on the CGT consequences for recipients of compensation amounts received. TR 95/35 discusses the various scenarios, including: • disposal of the underlying asset, • compensation for permanent damage to, or permanent reduction in value of, the underlying asset, and • disposal of the right to seek compensation. Under the key terms of TR 95/35, the ruling defines the right to seek compensation as: The right to seek compensation is the right of action arising at law or in equity and vesting in the taxpayer on the occurrence of any breach of contract, personal injury or other compensable damage or injury. A right to seek compensation is an asset for the purposes of Part IIIA. The right to seek compensation is acquired at the time of the compensable wrong or injury and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged. Paragraph 11 of TR 95/35 states that if the amount of compensation is not received in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. Paragraph 18 of TR 95/35 states that if the amount received is an undissected lump sum, the whole amount is treated as being consideration received on the disposal of the right to seek compensation. Paragraph 112 of TR 95/35 states that while the plaintiff's right to sue is a chose in action and is property, the right is created at the time of the breach of duty or injury giving rise to the cause of action. Paragraph 188 of TR 95/35 states the whether the receipt constitutes income or capital in the hands of the taxpayer depends on the circumstances of the receipt and the reasons why it was paid to the taxpayer. The lump sum that you will receive under the deed of settlement is for an underlying dispute relating to the diminution of shares (a CGT asset) rather than employment income. The payment was not earned by you as it does not relate to services performed. The payment is also a one-off payment and thus it does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation does not arise from a relationship to personal services performed. Accordingly, the compensation payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997. | Summary: The lump sum payment will be considered a capital gain. | Detailed Reasoning - Detailed reasoning: Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997. | Detailed Reasoning - Capital gains tax: Paragraph 108-5(1)(b) of the ITAA 1997 specifically includes a legal or equitable right within the definition of a capital gains tax (CGT) asset. A taxpayer's right to seek compensation is therefore classified as an intangible CGT asset which is acquired at the time of the compensable wrong or injury. Parts 3-1 and 3-3 of the ITAA 1997 contain the capital gains and capital loss provisions commonly referred to as the CGT provisions. Section 104-25 of the ITAA 1997 provides that CGT event C2 happens on the ending of the right to seek compensation, such as the right to take legal action, when it is satisfied, surrendered, released or discharged. You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those proceeds are less than the asset's reduced cost base. A right to seek compensation is disposed of when the taxpayer agrees to a release, discharge, satisfaction or surrender of his or her right to seek compensation. This is generally at the final point of settlement of the claim and receiving the compensation as outlined at paragraph 158 of TR 95/35. The lump sum payment will be considered a capital gain. CGT event C2 allows for the CGT 50% discount, you are eligible to apply the discount where you have owned the property for more than 12 months. As stated under paragraph 112 of TR 95/35, your right to sue is a chose in action and is property, the right is created at the time of the breach of duty or injury giving rise to the cause of action. You have owned the property for more than 12 months and are eligible for the 50% discount. | Summary: As the basic conditions under Subdivision 152-A of the ITAA 1997 will not be met, the payment is not eligible for the 15-year exemption under Subdivision 152-B of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subdivision 152-B of the ITAA 1997 allows a capital gain to be disregarded if all of the conditions contained in the Subdivision are satisfied. Under subsection 152-105(a) the first condition dictates the basic conditions of Subdivision 152-A must be satisfied. Under paragraph 152-10(1)(d) the CGT asset must satisfy the active asset test under section 152-35. The definition of an active asset is contained in section 152-40 and relevantly includes a CGT asset you own • that is used, or held ready for use in a business that is carried on by you, your affiliate or an entity connected with you • that is an intangible asset and it is inherently connected to a business that is carried on by you, your affiliate or an entity connected with you • shares in a company, or an interest in a trust, where the additional relevant criteria in subsections 3, 3A and 3B are met The definitions for 'affiliate' and 'connected with' are contained in sections 328-130 and 328-125 of the ITAA 1997 respectively. An affiliate includes a company that acts in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business. An entity is connected with another entity if either entity controls the other entity as described in section 328-125 or both entities are controlled by the same third entity. The CGT asset, being the right to seek compensation, is not an asset that is used, or held ready to be used, in a business being carried on. Nor is it a share in a company or an interest in a trust. The right to seek compensation is an intangible asset, however, it could not be said to be inherently connected to the business activities that are being carried on. An example of an intangible asset that is inherently connected with a business being carried on would be goodwill. Nor can the right to seek compensation be said to be connected to a business that is being carried on by an affiliate of yours or an entity that is connected with you. As such the right to seek compensation is not an active asset. Therefore, the basic conditions under Subdivision 152-A cannot be met, and it is not necessary to consider any of the other conditions under this Subdivision. As the basic conditions cannot be met the conditions under Subdivision 152-B of the ITAA 1997 cannot be met and the gain resulting from the payment is not eligible for the 15-year exemption.