Private ruling: Whether the compensation amount is assessable income
Date of advice: 23 August 2017
Published: December 2017
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the compensation received by you from the Government assessable under Division 6 of the Income Tax Assessment Act 1997 ? | A1: No | Q2: Is the compensation received by you from the Government assessable under Part 3-1 or Part 3-3 of the Income Tax Assessment Act 1997 ? | A2: Yes

Relevant facts and circumstances: You were bequeathed a right to receive compensation. You received compensation from the Government.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 15-10 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subsection 108-5(1)

Reasons for decision: Summary: Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) includes income according to ordinary concepts (ordinary income) and other assessable income (statutory income). Taxation Ruling TR 2006/3 discusses government payments to industry to assist the recipient to continue, commence or cease business. Included in the payments to cease business is a payment for agreeing to surrender part of the profit yielding structure. Paragraph 26 in part states Government payments to industry to commence or cease a business are not assessable as ordinary income of the recipient under section 6-5 or as a bounty or subsidy in relation to carrying on a business under section 15-10. In your case you received compensation. The payment is not a normal incidence of your business, nor is it paid for a purpose for which the business was carried on. The payment is for the surrender of part of the profit earning structure. The payment takes on the nature of the item it replaces and is a capital receipt and not assessable as ordinary income. Paragraph 6 in part states that although this Ruling does not deal with CGT issues, taxpayers should be aware that in those cases to which section 15-10 does not apply there will usually be CGT consequences. Amounts that are not ordinary income, but are included in your assessable income by provisions about assessability are called statutory income. One such statutory income is capital gains. CGT will apply when a CGT event happens to a CGT asset and it wasn’t an exception. Under subsection 108-5(1) of the ITAA 1997 a CGT asset is any kind of property or a legal or equitable right that is not property. Under section 104-25 of the ITAA 1997 CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: a. Being redeemed or cancelled; or b. Being released, discharged or satisfied; or c. Expiring; or d. Being abandoned, surrendered or forfeited; or e. If the asset is an option – being exercised; or f. If the asset is a convertible interest – being converted. In your case you had a right to receive compensation from the Government for the market value of certain assets. That right was surrendered when you entered into the Deed. CGT event C2 happened at that time as your ownership of an intangible asset ended by the asset being surrendered. The amount you received as a result of surrendering that right is assessable as a capital gain (less the asset’s cost base).