ATO Interpretative Decision

ATO ID 2003/1049 (Withdrawn)

Income Tax

• This ATO ID is withdrawn from the database as it is a simple restatement of the law and does not contain an interpretative decision.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

What are the capital gains tax consequences for the taxpayer of receiving an amount of $127 from a government department in relation to a misplaced cheque?

Decision

As the amount represents capital proceeds for a CGT event C2 (section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997)) that happened on the surrender of the taxpayer's right to seek compensation, and that amount equals the cost base of that right, there is no capital gain or capital loss for the taxpayer.

Facts

The taxpayer misplaced a cheque from a government department. On approaching the department to notify them of the loss, the taxpayer was asked to fill in a request for a duplicate cheque. The counter staff did not advise the taxpayer that they should not attempt to cash the cheque, should they find it, as the department would be placing a stop payment on the cheque.

The taxpayer then found the original cheque and deposited the cheque at their local bank. As there was a stop payment notation on the cheque, the bank dishonoured the cheque and charged the taxpayer a bank fee. The taxpayer complained to the bank, which investigated the matter and charged the taxpayer $127 for the costs of the investigation.

The taxpayer then wrote to the government department seeking reimbursement of these costs. The department concluded that the taxpayer had incurred the bank fees due to the actions of their counter staff, and agreed to pay the taxpayer an amount of $127 under a settlement agreement. On entering into that agreement, the taxpayer surrendered any further claims against the department.

Reasons for Decision

Taxation Ruling TR 95/35 deals with the tax treatment of compensation receipts, and recommends a look through approach in identifying the most relevant asset in respect of which compensation has been received. Where there is no relevant underlying asset, the Ruling advocates considering whether a CGT event happened to the right to seek compensation.

The taxpayer had no relevant underlying asset in respect of which the compensation was received. The additional bank charges arose as a result of the actions of the counter staff of the government department, and the reimbursement of those charges occurred in return for the taxpayer's agreement to surrender any further claims or rights they may have had against the department. Paragraph 108-5(1)(b) of the ITAA 1997 specifically includes a legal or equitable right within the definition of a CGT asset. The taxpayer's right to seek compensation is therefore a CGT asset.

CGT event C2 (section 104-25 of the ITAA 1997) happens when the ownership of an intangible CGT asset ends by the asset being satisfied or surrendered. This occurred when the taxpayer surrendered the right to seek compensation from the government department. The $127 of bank charges they incurred forms part of the cost base of this CGT asset (refer to paragraphs 99 - 105 of TR 95/35 for a discussion of the cost base of the right to seek compensation in these circumstances). The compensation of $127 is capital proceeds received in respect of the CGT event. As the capital proceeds equals the cost base of the CGT asset, there is no capital gain or capital loss resulting from the CGT event.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 104-25
   paragraph 108-5(1)(b)

Related Public Rulings (including Determinations)
Taxation Ruling TR 95/35

Keywords
Capital gains
Capital gains tax
CGT capital proceeds
CGT cost base
Compensation claims
Compensation income
Damages income
Negotiated settlements

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  21 November 2003

ISSN: 1445-2782