ATO Interpretative Decision
ATO ID 2002/385 (Withdrawn)
Income TaxCapital gains tax: CGT event H2: ex-gratia lump sum payment
FOI status: may be released
This ATO ID is withdrawn. The view expressed in this ATO ID is current and represents a straight application of the law. In the scenario dealt with in this ATO ID there is no asset to which a CGT event happens. In situations where there is an asset, the ATO view regarding the treatment of compensation receipts is addressed in Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts.This document has changed over time. View its history.
Status of this decision: Decision withdrawn 19 April 2018.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.
Will the taxpayer make a capital gain or capital loss under section 104-155 of the Income Tax Assessment Act 1997 (ITAA 1997) on receipt of an ex-gratia lump sum payment from a foreign government?
No. The taxpayer will not make a capital gain or capital loss under section 104-155 of the ITAA 1997 on receipt of the ex-gratia payment. As the taxpayer does not own a relevant CGT asset in relation to which an act, transaction or event has occurred, CGT event H2 in section 104-155 of the ITAA 1997 does not happen to the taxpayer.
The taxpayer is a resident of Australia for tax purposes.
The taxpayer served in the merchant navy of a foreign country during World War II.
The taxpayer received an ex gratia lump sum payment from the foreign government. The lump sum payment is tax-free in the foreign country.
Members of the armed forces of the foreign country were entitled to significant benefits after the war. The taxpayer was not entitled to these benefits.
The lump sum received from the foreign government was paid in recognition that significant benefits of war were not available to the taxpayer.
The amount of the payment depended on the length of the taxpayer's service in the merchant navy.
Reasons for Decision
Under section 102-25 of the ITAA 1997, CGT event H2 is relevant if no other CGT event applies to a particular transaction. In this case the only other CGT event that might be relevant is CGT event C2. It is not relevant here because it is not considered that the taxpayer had any rights against the foreign government that ended on the making of the payment.
CGT event H2 will happen if an act, transaction or event occurs in relation to a CGT asset that you own, and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base (subsection 104-155(1) of the ITAA 1997).
A taxpayer will make a capital gain from CGT event H2 if the capital proceeds are more than the incidental costs incurred that relate to the event. A taxpayer will make a capital loss if those capital proceeds are less (subsection 104-155(3) of the ITAA 1997).
Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property or a legal or equitable right that is not property.
It is considered that in this situation, the taxpayer did not own a relevant CGT asset. The foreign government did not create any rights in the taxpayer which were enforceable against the foreign government if they did not make the lump sum payment to the taxpayer.
As the receipt of the ex-gratia payment is not in respect of any act, transaction or even in relation to a CGT asset the taxpayer owns, CGT event H2 will not happen.
|Date of amendment||Part||Comment|
|23 May 2014||Facts||Updated for clarity.|
|Reason for decision||Updated for clarity.|
Year of income: Year ended 30 June 2001
ATO ID 2002/384
Capital gains tax
CGT events H1-H2 - special capital receipts