Private ruling: CGT - compensation
Published: March 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the amount you receive from Company X capital proceeds? | A1: Yes. | Q2: Is your receipt of capital proceeds exempt from capital gains tax (CGT) under Section 118-37 of the Income Tax Assessment Act 1997 (ITAA 97) | A2: No.


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 104-25 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Subsection 110-25(2) | Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)

Reasons for decision: Summary: There can be CGT consequences when you receive compensation. Taxation Ruling TR 95/35 gives the Commissioner's view on the treatment of compensation receipts. If a compensation payment is not in relation to an underlying asset, it relates to the disposal of the right to seek compensation (paragraph 11 of TR 95/35). Any capital gain arising on a disposal of that right is calculated using the cost base of that right. The cost base of the right to seek compensation is determined in accordance with the provisions of section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997). The consideration in respect of the acquisition of the right to seek compensation includes the total acquisition costs incurred as a result of which the right to seek compensation arose. The cost base of a CGT asset consists of five elements. The first element of the cost base is the total of the money you paid and the market value of any other property you gave in respect of acquiring it (section 110-25(2) of the ITAA 1997). Using the word "is", this is an exhaustive definition (paragraph 96 of TR 95/35). In respect of the right to compensation, any expenditure which results in the acquisition of the right which is indirect, with a narrow interpretation of the first element of the cost base, would not form part of the cost base (paragraph 97 of TR 95/35). The Commissioner believes that a wider view should be taken of what is included in the cost base of an asset (paragraph 98 of TR 95/35). If the right to seek compensation arises in respect of a monetary loss of the taxpayer, the amount of that loss is included in the cost base of the right to seek compensation for that loss (paragraph 104 of TR 95/35). The current case is similar to example 9 at paragraph 266 of TR 95/35. In that case, a superannuation fund, relying on advice from their legal advisers, lodged taxation returns on the basis that they were a complying fund. Due to irregularities in its taxation records, amended assessments were raised against the superannuation fund. The fund sought to recover the additional tax liability and penalties. The fund received the amount claimed plus legal costs. The cost base was the amount of additional tax and penalties plus any legal costs incurred in pursuing the claim against the advisers. There was no capital gain or loss. If there was a capital gain or capital loss it would be the difference between the incidental costs and the compensation received. A CGT event happened (CGT event C2 under section 104-25 of the ITAA 1997) when your ownership of the right to seek compensation ended by being released, satisfied or surrendered. This occurred when the right to seek compensation from the advisors was surrendered.

Relevant facts: You and your spouse were residents in country A and held country A pensions. | You and spouse moved permanently to Australia and prior to moving consulted with a business in relation to transferring your country A pension benefits. | You received some of financial advice from the business in relation to your country A pensions. | You have suffered a financial loss as a result of relying on the advice. | You lodged a complaint with the financial ombudsman service (ombudsman) in the country A. | You have provided a copy of the following document which forms part of this private ruling: | We have obtained the following information from this document. | The ombudsman considered your complaint and made orders that the business compensate you a sum of money either by depositing the payment into the pension account or to you personally. | You have not received this compensation payment.