Private ruling: Foreign lump sum payment
Published: February 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Question and answer | Is the foreign lump sum payment you received assessable? | No.

Relevant facts and circumstances: You invested funds with a foreign company. The company made various claims in relation to the returns you could expect to receive from your investment. The financial regulator in the foreign country subsequently determined that the company had made fraudulent claims and was a type of 'Ponzi' scheme. The regulator took legal action to close down the company and a Receiver was appointed. You had not received any return on your investment prior to the Receiver being appointed. You subsequently received a payment from the Receiver which represented X% of your original investment. Foreign tax was originally withheld from the payment you received; however, this amount was subsequently refunded to you. According to the Receiver, additional funds may be distributed to investors in the future.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 subsection 110-45(3)

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: • are earned • are expected • are relied upon, and • have an element of periodicity, recurrence or regularity. In your case, you received a lump sum payment which represented a partial return of an amount you invested with a foreign company. Therefore, the lump sum payment is a capital receipt and is not assessable as ordinary income. Further, as the amount merely represents a return of your investment capital, it is not assessable under the capital gains tax legislation. You are not yet taken to have disposed of your investment as a further distribution of funds from the Receiver is possible. Therefore, you have not made a capital loss (or gain) at this time In calculating any capital loss (or gain) in the future, the amount you have already received, along with any amount you may receive in the future, is taken to reduce the cost base (original acquisition cost) of the investment (subsection 110-45(3) of the ITAA 1997). You will make a capital loss if the total of payments received is lower than the original investment and you will make a capital gain if the total received is greater than the original investment.