Private ruling: Assessability of compensation and annuity
Date of advice: 23 December 2015
Published: March 2016
Ruling period: 1 July 20XX to 30 June 20YY.
Date scheme commenced: 1 July 20XX.

Ruling: Questions and answers: | 1. Is the amount of compensation you received included in your assessable income in Australia? | Yes. | 2. Are you entitled to claim a relative capital loss in relation to the compensation payment? | No. | 3. Is your annuity payment included in your assessable income in Australia? | Yes.

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You invested money in a foreign company. Your investments were mismanaged and you received compensation from the government of the foreign country for the assumed loss of earnings on your investments. You were advised in writing of your entitlement and a cheque for your compensation was issued shortly after. The amount of your assumed loss of earnings were calculated under a compensation scheme that only entitled you to a portion of your assumed loss of earnings. You did not receive any compensation for the difference between the amount of your assumed loss of earnings and the amount you were paid under the compensation scheme. You continue to receive a regular annuity payment from overseas.

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 10-5 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1936 Section 27H

Reasons for decision: Detailed Reasoning - Assessable income of Australian resident taxpayers - general: As a general rule, the assessable income of a resident Australian taxpayer includes all the ordinary and statutory income they receive in an income year from sources in or out of Australia. Ordinary income includes, amounts that are earned, expected, relied upon, and has an element of periodicity, recurrence or regularity about them. Interest earned on investments is an example of ordinary income. Types of statutory income that may be included in the assessable income of an Australian resident taxpayer include: • gains or losses made in relation to a capital gains tax (CGT), and • income in the form of annuities. | Detailed Reasoning - Assessability of compensation: It is a well established principle of law that a compensation amount generally bears the character of that which it is designed to replace. You received compensation in the form of a one off payment that was designed to compensate you for the loss of assumed returns on your investments. We consider the amount paid to you was an amount of ordinary income and is assessable as such in the year you received it. Although it was a one off payment, it is reasonable to conclude that as an investor, you expected your investments to provide a return and it is also reasonable to conclude that you were relying on the investments to provide you with a return. | Detailed Reasoning - Capital gains tax: The CGT provisions are contained in Parts 3-1 and 3-3 of the ITAA 1997. Any gain or loss made from a CGT event happening to CGT asset you own is potentially assessable under the CGT provisions. You make a capital gain if the cost base of a CGT asset is less than the capital proceeds received as a result of a CGT event happening to the asset. A capital loss results if the cost base exceeds the capital proceeds received. A right to receive foreign currency is a CGT asset and CGT event C2 (end of a CGT asset) happens if the asset ends. In the case of a right to receive foreign currency, the asset is taken to end when you receive the currency you have a right to. You obtained a right to receive foreign currency when you were written to and advised you were entitled to receive an amount under the compensation scheme. For CGT purposes, the fact that the amount you received under the compensation scheme was only a portion of your assumed loss of earnings is irrelevant. The fact is, under the provisions of the compensation scheme you were only entitled to compensation of a specific amount and that is the amount that is taken into consideration when determining the cost base of your CGT asset, not the amount that was considered to be your assumed loss of earnings under the compensation scheme. Considering the above, you are not entitled to claim a capital loss for the difference between the amount of your assumed loss of earnings and the amount you were paid under the compensation scheme. The difference between the two amounts has no relevance for the purpose of the CGT provisions in Australia. | Detailed Reasoning - Annuity payment: Section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the amount of an annuity derived by a taxpayer (excluding, any amount that is the deductible amount in relation to the annuity) is included in the taxpayer's assessable income in the year it is received. The annuity payment you receive (excluding, any amount that is the deductible amount in relation to the annuity) is included in your assessable income in Australia. | Detailed Reasoning - Conclusions: The compensation you received is an amount of ordinary income and is included in your assessable income in the year you received it. You are not entitled to claim a capital loss for the difference between the amount of your assumed loss of earnings and the amount you were paid under the compensation scheme. Your annuity (excluding, any amount that is the deductible amount in relation to the annuity) is assessable in Australia in the year you receive it.