ATO Interpretative Decision

ATO ID 2002/958

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does an indemnity received from the disposal of an asset constitute 'any other property' under paragraph 116-20(1)(b) of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision

Yes. An indemnity received from the disposal of an asset constitutes 'any other property' under paragraph 116-20(1)(b) of the ITAA 1997.

Facts

The taxpayer entered into a contract to sell a CGT asset. Under the terms of the sale contract the taxpayer received cash and several other benefits in return for the CGT asset. The benefits included an indemnity against specified future costs. The exact amount payable under the indemnity was not known at the time of entering into the contract.

Reasons for Decision

Section 116-20 of the ITAA 1997 specifically includes, in the capital proceeds, the value of property received in relation to a CGT event. However, property is not defined in the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997 therefore the general meaning of the word is used for income tax purposes.

The CCH Macquarie Concise Dictionary of Modern Law defines property as '1. Ownership, 2. Anything capable of being owned'.

An indemnity, which is also not defined in either the ITAA 1936 or the ITAA 1997, is defined in The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW as:

'1.

protection or security against a loss

2.

Compensation for damage or loss sustained

3.

Legal protection as by insurance from liabilities or penalties incurred by one's actions.'

An indemnity is capable of being owned and is therefore property as per the definition above.

The courts have defined the term property very widely to not only include an asset but also rights in an asset. In Kelly v Kelly (1990) 64 ALJR 234; (1990) 92 ALR 74 the court concluded that if a right or interest is capable of being transferred or alienated, it will be property, even if a transfer may only be effected indirectly with the consent of some person or authority.

The ordinary meaning of the word property would include, for example a right such as a chose in action. A chose in action being anything that is recoverable by action as opposed to something which is enjoyed by possession. There are many rights which are recognised at law as clearly falling within the definition of a chose in action. Halsbury's laws of England 4th edn classification adopts five broad categories:

'•

Debts, debentures, negotiable instruments, annuities and similar obligations

•

The benefit of a contract, an option to purchase land or shares, rights to be issued, shares in a company etc

•

Recognised subjects of property, such as shares in a company, listed securities of all kinds, policies of insurance, copyrights patents, trademarks etc

•

Equity rights to property, such as beneficial interests under trust, a share in a partnership, a mortgage or right to the supply on the exercise by mortgage of his power of sale

•

Miscellaneous rights which include rights of action arising under contract and tort, the right of a discretionary object under a trust to force the trustee to carry out his duties, the right to indemnity and other enforceable rights.'

An indemnity falls in the first classification of a chose in action, is proprietary in nature and capable of being assigned. It is therefore property under the ordinary meaning of the word and for the purpose of paragraph 116-20(1)(b) of the ITAA 1997.

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   paragraph 116-20(1)(b)

Case References:
Kelly v. Kelly
   92 ALR 74

Related Public Rulings (including Determinations)
TR 95/35

Related ATO Interpretative Decisions
ATO ID 2002/941

Other References:
Macquarie University, The CCH Macquarie Concise Dictionary of Law , CCH Australia Limited, Sydney 1993
The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW
Halsbury's laws of England, 4th edn

Keywords
Capital gains tax
CGT assets
CGT capital proceeds
CGT event A1 - disposal of a CGT asset

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  2 October 2002
Date reviewed:  17 March 2014

ISSN: 1445-2782