Private ruling: Other income - compensation payment
Date of advice: 6 January 2017
Published: June 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is your share of the lump sum settlement payment assessable as ordinary income? | A1: No. | Q2: Did CGT event C2 happen when you entered into the Deed of Settlement and Release? | A2: Yes. | Q3: Are you entitled to apply the general 50% discount to your capital gain? | A3: Yes.

Relevant facts and circumstances: You and your spouse engaged a financial planner to provide you with financial advice. You and your spouse made a claim against the financial planner as there was a dispute in regards to the financial advice you received from them. In order to settle the matter you and your spouse entered into a Deed of Settlement and Release with the financial planner whereby it was agreed that the financial planner would pay you a lump sum payment in full and final settlement of all claims which you and your spouse had, or at any time thereafter may have, against the financial planner as a result of the dispute. You did not incur any legal expenses in relation to the dispute.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(2) Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 118-37(1) | Income Tax Assessment Act 1997 section 115-25

Reasons for decision: Detailed Reasoning - Ordinary Income: Your assessable income includes income according to ordinary concepts, which is called ordinary income (section 6-5 of the ITAA 1997). 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. Compensation payments are considered to be ordinary income where the payments are compensation for the loss of income or where some portion of the payment is identifiable and quantifiable as income. In your case, the lump sum payment you received was not for loss of income, nor is any part of it identifiable as income. As such, the lump sum payment is not assessable as ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Capital gains tax: Your assessable income includes your net capital gain for the income year (subsection 102-5(1) of the ITAA 1997). You make a capital gain (or loss) as a result of a CGT event happening (section 102-20 of the ITAA 1997). CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including being released or cancelled (subsection 104-25(1) of the ITAA 1997). The time of the event is when you enter into the contract that results in the asset ending, or if there is no contract, when the asset ends (subsection 104-25(2) of the ITAA 1997). A CGT asset is any kind of property or a legal or equitable right that is not property (section 108-5 of the ITAA 1997). In your case, your right to seek compensation was an intangible CGT asset (acquired at the time of the compensable wrong) and your ownership of that asset ended when you entered into the Deed of Settlement and Release with the financial planner. At that time CGT event C2 happened. Capital proceeds The capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive, in respect of the event happening, and the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event) (section 116-20 of the ITAA 1997). In your case, the capital proceeds will include your share of the lump sum payment received under the Deed of Settlement and Release. You make a capital gain if those proceeds are more than the right's cost base. Cost base The cost base of the right to seek compensation is determined in accordance with the provisions of section 110-25 of the ITAA 1997. The cost base of a CGT asset consists of 5 elements (subsection 110-25(1) of the ITAA 1997). The first element includes in the cost base any consideration in respect of the acquisition of the right to seek compensation (subsection 110-25(2) of the ITAA 1997). As a general rule, a taxpayer does not pay or give any money or property to acquire the right to seek compensation. The second element is the incidental costs you incurred to acquire a CGT asset or that relate to a CGT event (subsection 110-25(3) of the ITAA 1997). Incidental costs include remuneration for the services of accountants, financial advisers and legal adviser (subsection 110-35(2) of the ITAA 1997). However, expenditure does not form part of the second element of the cost base to the extent that you have deducted it or can deduct it (subsection 110-45(1B) of the ITAA 1997). The other three elements are not relevant to your circumstances. Based on the information you have provided your cost base is nil. 50% general CGT discount Section 115-25 of the ITAA 1997 generally allows any individual to apply a 50% discount to any capital gain provided that the CGT event to which the capital gain relates occurs at least 12 months after the asset is acquired. You acquired the right to seek compensation when the allegedly inappropriate financial advice was provided to you some years ago. You disposed of this right when you entered into the Deed of Settlement and Release. As your right to seek compensation was acquired more than 12 months before the disposal occurred, you can apply the 50% general discount to the capital gain you made from CGT event C2 happening. | Detailed Reasoning - Application to your case: Your 50% share of the lump sum payment received for entering into the Deed of Settlement and Release are capital proceeds from CGT event C2 happening. The cost base of your right to seek compensation was nil. As you acquired the right to seek compensation more than 12 months before the disposal occurred, you can apply the 50% general discount to your capital gain.