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ATO Interpretative Decision

ATO ID 2003/353

Income Tax

Capital Gains Tax: compensation payment received for cessation of allowance
FOI status: may be released

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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does CGT event D1 in section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when a taxpayer enters into an agreement not to take any legal action in relation to the cessation of the payment of an allowance by another entity?

Decision

Yes. CGT event D1 in section 104-35 of the ITAA 1997 happens when a taxpayer agrees not to take any legal action in relation to the cessation of an allowance.

Facts

The taxpayer had for many years received an allowance from another entity.

In the 2002-03 income year it was decided that the allowance would no longer be paid. At that time the taxpayer signed a deed agreeing not to take any legal action in relation to the cessation of the allowance.

Upon signing the deed the taxpayer received a payment from the other entity.

Reasons for Decision

CGT event D1 in section 104-35 of the ITAA 1997 happens if you create a contractual right or other legal or equitable right in another entity. Subsection 104-35(3) of the ITAA 1997 provides that you make a capital gain from the event if the capital proceeds from creating the right are more than the incidental costs incurred in doing so.

CGT event D1 happened when the taxpayer created a right in the other entity to resist any legal action by the taxpayer in relation to the cessation of the allowance. The event happened when the agreement between the parties was made (subsection 104-35(2) of the ITAA 1997). The taxpayer made a capital gain from CGT event D1 equal to the difference between the payment received from the other entity and the taxpayer's incidental costs.

Note: The payment may also be assessable as ordinary income under section 6-5 of the ITAA 1997, or as a bounty or subsidy under section 15-10 of the ITAA 1997. In either case subsection 118-20(2) of the ITAA 1997 would apply to reduce any capital gain the taxpayer made under CGT event D1.

Date of decision:  7 March 2003

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   section 15-10
   section 104-35
   subsection 104-35(3)
   subsection 104-35(2)
   subsection 118-20(2)

Related ATO Interpretative Decisions
ATO ID 2003/352
ATO ID 2003/354
ATO ID 2003/355

Keywords
Capital gains
CGT events
Lump sum payment

Business Line:  Losses and capital gains tax Centre of Expertise

Date of publication:  15 May 2003

ISSN: 1445-2782

history
  Date: Version:
You are here → 7 March 2003 Original statement
  12 March 2010 Archived

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