ATO Interpretative Decision
ATO ID 2003/355
Income Tax
Capital Gains Tax: compensation payment received for cessation of allowanceFOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is there a disposal of an asset for the purposes of Part IIIA of the Income Tax Assessment Act 1936 (ITAA 1936) 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. As the taxpayer has created a right that, on its creation vests, in another entity, subsections 160M(6) and (6A) of the ITAA 1936 treat the taxpayer as having owned the right and to have disposed of it to the other entity.
Facts
The taxpayer had for many years received an allowance from another entity.
In the 1995-96 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
Subsection 160M(6) of the ITAA 1936 provides that subsections 160M(6A) and (6B) of the ITAA 1936 apply if a person creates an asset that is not a form of corporeal property and which, on its creation, vests in another person.
Subsection 160M(6A) of the ITAA 1936 outlines the consequences for the person creating the asset. It provides that the person creating the asset is taken to have acquired it and commenced to own it at a particular time and to have later disposed of it.
By entering into the deed the taxpayer created a right in another entity to resist any legal action in relation to the cessation of the allowance. As the right is not a form of corporeal property, subsection 160M(6) of the ITAA 1936 and the consequences determined under subsection 160M(6A) of the ITAA 1936 will apply.
The right is taken to have been acquired by the taxpayer immediately before the deed was entered into (subparagraph 160U(6)(a)(ii) of the ITAA 1936) and is taken to have been disposed of at the time of entry into the agreement (subparagraph 160U(6)(a)(iii) of the ITAA 1936).
The amount paid by the entity to the taxpayer will be consideration for the disposal of the right (subsection 160ZD(1) of the ITAA 1936).
Year of income: Year ended 30 June 1996
Legislative References:
Income Tax Assessment Act 1936
subsection 25(1)
paragraph 26(g)
subsection 160M(6)
subsection 160M(6A)
subparagraph 160U(6)(a)(ii)
subparagraph 160U(6)(a)(iii)
subsection 160ZA(4)
subsection 160ZD(1)
Related Public Rulings (including Determinations)
Taxation Ruling TR 95/35
ATO ID 2003/352
ATO ID 2003/353
ATO ID 2003/354
Keywords
Capital gains
CGT events
Lump sum payment
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 1 April 2003 | Original statement |
| 12 March 2010 | Archived |