ATO Interpretative Decision

ATO ID 2003/985

Income Tax

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

Issue

Is compensation paid by a company to the taxpayer, a former Great Central Mines (GCM) shareholder, assessable as either ordinary or statutory income?

Decision

Yes. The compensation paid was made up of three components. The first component of the receipt is included in the calculation of any net capital gain included in the shareholder's 1999 taxation return, as additional capital proceeds received in respect of the takeover of the shares in GCM. The second and third components of the receipt, being pre-judgement and post-judgement interest respectively, are to be included as interest income in the taxpayer's 2003 taxation return.

Facts

The taxpayer owned shares in GCM. Some shares were acquired before 20 September 1985 and some afterwards.

GCM was taken over by Yandal Gold Pty Ltd (Yandal) in early 1999. Due to concerns about the takeover process, Australian Securities and Investments Commission (ASIC) contended that the shareholders had accepted a lower amount as the price per share on the takeover than should have been the case.

ASIC took Yandal to court and after a lengthy battle through various levels of courts, judgement was handed down granting former GCM shareholders additional sums (first component) to compensate them for the disadvantage they had suffered as a result of the takeover by Yandal. These amounts were paid to the taxpayer during the year ended 2003. The amount also included pre-judgement and post-judgement interest (second and third components respectively).

Reasons for Decision

Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a look-through approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 4 of this ruling states that where the amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset of the taxpayer, the compensation represents additional consideration received for the disposal of that asset.

The most relevant asset in respect of which compensation has been received by the taxpayer is their shares in GCM. The additional money received (first component) will therefore be treated as additional capital proceeds received in respect of the takeover of these shares.

For the shares acquired before 20 September 1985, there will be no CGT consequences. For the shares acquired on or after 20 September 1985, the additional proceeds may lead to an increased capital gain, if the original disposal had resulted in a capital gain, or a reduced capital loss, if the original disposal had resulted in a capital loss.

The adjusted capital gain or capital loss needs to be reflected in the taxpayer's assessable income for the 1999 income tax year. Under subsection 170(2) of the Income Tax Assessment Act 1936 the Commissioner may amend the taxpayer's assessment (where there has been no fraud or evasion) within a 4 year period which commences on the day after the day the tax became due and payable for the original 1999 assessment (see note 2).

The receipt of pre-judgement interest included in compensation received in respect of non-personal injury, is considered in ATO Interpretative Decision 2003/404 to be ordinary income, and assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). The receipt of post-judgement interest is considered in paragraph 26 of the Taxation Ruling TR 95/35 and is also assessable income of the taxpayer under section 6-5 of the ITAA 1997. Both pre and post-judgement interest income components of the payment should be included as assessable income of the taxpayer in the 2003 income year.

Note 1: For a taxpayer who has elected for shorter period of review (SPOR) the maximum period of amending the assessment (where there has been no fraud or evasion) is 2 years which commences on the day after the day the tax became due and payable on the original assessment. However this will not affect the amendments to the GCM shareholder's assessments, as the SPOR system was available to taxpayers for assessments to the 2001 income year and later years only.

Note 2: For companies and funds, the four year period commences on the day after the day on which the assessment is deemed by section 166A of the ITAA 1936 to have been made.

Year of income:  Year ended 30 June 1999 Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
   section 166A
   subsection 170(2)

Related Public Rulings (including Determinations)
Taxation Ruling IT 2444
Taxation Ruling TR 95/35

Related ATO Interpretative Decisions
ATO ID 2003/404

Keywords
Amendment of assessments
Capital gains
Capital gains tax
CGT assets
CGT capital proceeds
CGT event A1-disposal of a CGT asset
Compensation Income
Court judgements
Interest in underlying asset
Interest income
Time of CGT event

Business Line:  Losses & CGT Centre of Expertise

Date of publication:  7 November 2003

ISSN: 1445-2782