Private ruling: Capital gains tax and compensation received from the Commonwealth of Australia in respect of superannuation
Published: March 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Questions and answers | 1. Will the undissected lump sum payment that you receive be treated as capital? | Yes. | 2. Will any capital gain arising from the undissected lump sum payment be disregarded? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You made a claim as a former Commonwealth employee for an amount of compensation. The claim represents the total interest and indexed pension loss as a result of the Commonwealth's failure to advise you of a shortfall in employee superannuation contributions. The wrong that was identified relates to actions that began some time prior to 20 September 1985. The amount is not compensation for actual member contributions but for the pension that would have resulted if the contributions were made correctly and in a timely manner. You are now over the relevant pension age and if the wrong had not occurred, you would be due a higher tax free pension. Following an investigation into your claims and the receipt of independent actuarial advice the Commonwealth has recently agreed to settle the claim. You have provided a copy of the deed of release and indemnity between yourself and the Commonwealth. You have also provided a copy of the actuarial advice commissioned by the relevant Commonwealth Department summarising the background and effect of the delays in employee contributions. These documents are to be read in conjunction with, and form part of, this private ruling.

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 and | Income Tax Assessment Act 1997 Section 109-5.

Reasons for decision: Detailed Reasoning - 1. Will the undissected lump sum payment that you receive be treated as capital?: Whether a compensation payment is capital or revenue depends on what the compensation payment is intended to replace. Generally, a payment will be on revenue account if it is intended to replace another amount which would have been income. It is therefore necessary to distinguish between compensation for loss of income on the one hand and compensation for the loss of the ability to produce income or the right to receive income on the other. A payment will be compensation for a loss in earning capacity where the taxpayer has a reduced capacity to earn income and the payment is made in respect of that loss. A payment will be compensation for a loss in income where the taxpayer has suffered a loss in earning capacity, either temporary or permanent, but the compensation is paid in respect of the loss of income only ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142, 1989 20 ATR 1516). Taxation Ruling TR 95/35 considers the capital gains tax consequences of compensation receipts. Paragraph 18 of TR 95/35 states; If the amount of compensation received is an undissected lump sum, the whole amount is treated as being consideration received for the disposal or the right to seek compensation. The decisions of the High Court in McLaurin v. FC of T (1961) 104 CLR 381 and Allsop v. FC of T (1965) 113 CLR 341 stand as authority for the proposition that where damages are paid by way of a single undissected lump sum which may, in the calculation of the payer, include income items as well as capital items, that single undissected lump sum will be treated as capital. In your situation we have concluded that the payment you will receive is an undissected lump sum for negligence which resulted in the loss of the capacity to earn income in the form of superannuation benefits. As the capacity to earn income is considered to be a capital asset the payment is considered to be capital in nature. | Detailed Reasoning - 2. Will any capital gain arising from the undissected lump sum payment be disregarded?: Section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event C2 happens if a taxpayer's ownership of an intangible CGT asset ends because it is released, discharged or satisfied. The relevant CGT asset in your case is your right to seek damages for the superannuation funds failure to advise you of a shortfall in your employee contributions. When you enter into the deed of release and indemnity with the Commonwealth of Australia, CGT event C2 will happen as you are releasing the Commonwealth of Australia from any further claim that you may have against them. A capital gain or capital loss that you make on an asset that you acquired prior to 20 September 1985 is disregarded. Section 109-5 of the ITAA 1997 provides that a taxpayer generally acquires a CGT asset when they become its owner. You acquired the right to seek damages at the time that the wrong first occurred. As the wrong first occurred prior to 20 September 1985, any capital gain or loss that you make as a result of CGT event C2 happening will be disregarded.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.