Private ruling: Storm Financial collapse
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010
Date scheme commenced: 1 July 2008

Ruling: Q1:  | A1: 


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 6-5 | Income Tax Assessment Act 1997 - Subsection 6-5(1) | Income Tax Assessment Act 1997 - Subsection 6-5(2) | Income Tax Assessment Act 1997 - Section 104-10 | Income Tax Assessment Act 1997 - Section 104-25 | Income Tax Assessment Act 1997 - Subsection 104-25(1) | Income Tax Assessment Act 1997 - Section 108-5 | Income Tax Assessment Act 1997 - Section 116-20

Reasons for decision: Detailed Reasoning - Capital gains tax (CGT) consequences - equity component: The general capital gains tax (CGT) provisions are set out in Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Under the CGT provisions a taxpayer will make a capital gain or capital loss only if a CGT event happens. To determine if a CGT event happens in respect of a compensation payment it is necessary to consider the nature of the asset to which the compensation payment relates. The Commissioner's policy on the treatment of compensation payments is set out in Taxation Ruling TR 95/35 (capital gains: treatment of compensation receipts). TR 95/35 states that the particular asset for which compensation has been received by the taxpayer may be: · an underlying asset; · a right to seek compensation; or · a notional asset in terms of subsection 160M(7) - (section 104-155 of the ITAA 1997). (TR 95/35 provides legislative references that relate to the Income Tax Assessment Act 1936 ). The equivalent provisions in the ITAA 1997 are cited where appropriate.) In determining which is the most relevant asset it is often appropriate to adopt a 'look through' approach to the transaction or arrangement which generates the compensation receipt. In TR 95/35 the term 'underlying asset' is used. The underlying asset is defined in TR 95/35 as: the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity. If there is more than one underlying asset, the relevant underlying asset is the asset which leads directly to the payment of the amount of compensation. For example, if a taxpayer receives an amount of compensation for the destruction of his or her truck, the truck is the underlying asset. Taxation Ruling TR 97/3 also discusses compensation and deals with compensation received by landowners from public authorities. It explains at paragraph 2 that it extends the application of TR 95/35 and should be read in conjunction with that ruling. Paragraphs 4 to 8 of TR 97/3 discuss the compensation received from a public authority for the compulsory acquisition of an easement and states that:- 4. Compensation in respect of an easement created by statute in favour of a public authority cannot be said to have been received for the grant of the easement. The Land Acquisition (Just Terms Compensation) Act 1991 (NSW) and similar Acts in other jurisdictions enable public authorities to take land or an interest in land (including an easement) for specified purposes and confer on the affected landowner a right to compensation. In these circumstances, the landowner cannot be said to have created an asset as required for subsection 160M(6) of the Act (now includes 104-35 of the ITAA 1997) to apply. The easement is created by operation of the relevant statute and is vested in the public authority. This constitutes a compulsory acquisition of the easement. 5. The compensation received by a landowner from a public authority that compulsorily acquires an easement is not excluded from the scope of TR 95/35 by paragraph 2 of that Ruling which states that: 'This Ruling does not consider: · ..... · amounts received for the grant of easements, profits a prendre and licences - these are covered in detail in Taxation Ruling IT 2561 and in Taxation Determinations TD 93/235 and TD 93/236'. 6. A strict application of Part IIIA would require the compensation received from a public authority to be treated as consideration in respect of the disposal by the landowner of the right to compensation. However, TR 95/35 focuses on the asset to which the compensation receipt most directly relates. In the case of easements acquired under statute and the consequential disposal of the right to compensation, the most relevant asset is the landowner's pre-existing land with its rights of ownership including, for example, a right to exclude all others. This right to exclude all others is forfeited in part when the easement comes into existence. The loss of part of this right constitutes the disposal of part of the underlying asset (the land) for Part IIIA purposes (paragraph 160M(3)(b) (now 104-25(1) of the ITAA 1997), subsection 160M(1) (now 104-10(2) and 109-5(1) of the ITAA 1997) and section 160R (now 108-5(2)(a) of the ITAA 1997). 7. Paragraph 4 of TR 95/35 states that: If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation. 8. Applying this approach, an amount of compensation received by a landowner for the loss of part of the rights of ownership is accepted as being consideration received in respect of the part disposal of the underlying asset (the land). The amount is not consideration for disposal of the right to seek compensation. The ruling also considers a number of other circumstances when a landowner grants an easement on their land and in all but one instance the amount received is treated as consideration in respect of the part disposal of the land. To the extent that the payment relates to the disposal of an underlying asset, CGT event A1 under section 104-10 of the ITAA 1997 happens. | Detailed Reasoning - This case:: You and your spouse were clients of Storm. You and your spouse applied and were granted a margin loan from a division of your financial institution. The margin loan was used to acquire various stocks and investments. It may have included units in a Storm branded index fund for which the responsible entity was the financial institution or one of its related bodies. Some time later the financial institution determined that you and your spouse's historical current loan to security ratio had exceeded its historical margin call loan-to-security ratio. The financial institution did not sell your investments until after it determined that you and your spouse's loan had exceeded its loan to security ratio. The financial institution with either you and your spouse, or with your solicitors, have made a claim against the financial institution for compensation concerning the circumstances surrounding the margin call and/or the security and the repayment of indebtedness under the margin call. The CBA issued a letter to you and your spouse offering details of the proposal and settlement deed. The settlement deed agreed to pay you and your spouse compensation of $X and interest of $X. On the facts of this case, it is considered that the compensation received had a direct and substantial link with the underlying asset (the investments). Accordingly, in line with the guidelines provided in paragraph 4 of TR 95/35 and TR 97/3 it is considered that the compensation amount was received as part of the underlying asset and it was not received for the disposal of any other asset, such as the right to seek compensation. The amount of $X is therefore accepted as consideration received for the disposal of the underlying assets and CGT event A1 in section 104-10 of the ITAA 1997 occurred when your investments were sold. Please note that because you have received additional capital proceeds in respect of previous CGT events this will mean you will need to adjust any capital gains or capital losses that you included in the 2008-09 and 2009-10 income years. | Detailed Reasoning - Interest component: The taxation treatment of the interest component of the payment that you received is discussed in paragraph 26 of TR 95/35 when it states that:- Interest awarded as part of a compensation amount is assessable income of the taxpayer under the general income provisions. If the taxpayer receives an undissected lump sum compensation amount and the interest cannot be separately identified and segregated out of that receipt, no part of that receipt can be said to represent interest. If the compensation cannot be dissected it is likely that the whole amount relates to the disposal of the right to seek compensation. In this instance the interest of $X is separately identified and segregated out of the lump sum and as such is assessable income under the general income provisions in section 6-5 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Issue 1: Question: Is the equity component of the compensation payment that you received additional capital proceeds? | Issue 2: Question: Will the interest component of the compensation payment be assessable income? | Relevant facts: You and your spouse were clients of Storm Financial Limited (Storm) and received financial advice from Storm. | On the advice of Storm and with Storm's assistance you and your spouse applied for a margin loan. | The margin loan was approved and the margin loan was advanced to you and your spouse. | The margin loan was secured by various stocks and investments purchased with the proceeds of the margin loan. The security may have included units in a Storm branded index fund for which the responsible entity was your financial institution or one of its related bodies corporate. | The financial institution notified you and your spouse and/or Storm of the security value and the loan to security ratios of the margin loan from time to time. | Between June 2008 and the effective date, one or more (but not necessarily all) of the following occurred in relation to the margin loan: | (a) the current loan-to-security ratio of the margin loan exceeded the base loan-to-security ratio of the margin loan; | (b) the margin loan went into margin call when the current loan-to-security ratio of the margin loan exceeded the margin call loan-to-security ratio; | (c) the financial institution notified Storm, as you and your spouses agent, of the margin call; | (d) the margin loan went into default; | (e) you and your spouse converted some, or all, of the security into cash held in an accelerator cash account as security; | (f) you and your spouse sold some, or all, of the security to repay indebtedness under the margin loan; | (g) the financial institution sold some, or all of, the security and applied the proceeds to repay indebtedness under the margin loan; | (h) the margin loan was repaid, including through the breakage of any fixed rate component of the margin loan; | (i) break costs were charged to the margin loan by the CBA in relation to the breakage of a fixed rate component of the margin loan; | (j) one or more of the index funds comprising the security was suspended and/or closed by the relevant responsible entity; | (k) the margin loan was closed; | (l) the security sale proceeds were insufficient to cover you and your spouse's indebtedness under the margin loan and there remains money owing by you and your spouse to the CBA under the margin loan. | You and your spouse have, either directly or through your lawyers, made a claim and/or demand against the financial institution for compensation concerning the circumstances of the margin loan and/or the security and repayment of indebtedness under the margin loan. | The parties have participated in a dispute resolution process (the scheme) on the terms set out in the Borrower Deed. | By participating in the scheme the parties agreed to: | (a) the payment of the Settlement Sum by the financial institution to you; | (b) the closure or variation of the margin loan as set out in the Deed, and | (c) the releases which are set out in the Deed. | In a letter dated early last year, the financial institution provided details of your entitlement under the settlement deed. | The Deed provided for a settlement amount of a specified amount which comprised of components which we have outlined to you. | You and your spouse have received the settlement amount. | You have provided a copy of the Deed and a margin loan statement. These documents are to be read in conjunction with and form part of this private ruling.