Edited version of private ruling

Authorisation Number: 1011637476031

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

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Ruling

Subject: Private ruling - Claim against your former advisor

Issue 1

Question 1

If you surrender your interest in the X project before its completion, will there be a CGT event under Part 3-1 of the ITAA 1997?

Answer

Yes.

Question 2

If you surrender your interest in the X project before its completion, will you be assessed on the market value of any trading stock you had under subsection 70-90(1) of the ITAA 1997?

Answer

Yes.

Issue 2

Question 1

If you surrender your interest in the Y project before it is wound up, will there be a CGT event under Part 3-1 of the ITAA 1997?

Answer

Yes.

Question 2

If a liquidator, in the process of winding up the Y project, sells your trading stock, will you be assessed on the market value of that trading stock under subsection 70-90(1) of the ITAA 1997?

Answer

Yes.

Issue 3

Question 1

If you surrender your interest in the Y project before it is wound up, will there be a CGT event under Part 3-1 of the ITAA 1997?

Answer

Yes.

Question 2

If a liquidator, in the process of winding up the Y project, sells your trading stock, will you be assessed on your sales proceeds under section 6-5 of the ITAA 1997?

Answer

Yes.

Issue 4

Question 1

Upon settlement will $B, being the amount paid in consideration of your X interest, be capital proceeds from the disposal of a CGT asset?

Answer

Yes.

Question 2

Upon settlement will $C, being the amount paid in consideration of your Y interest, be capital proceeds from the disposal of a CGT asset?

Answer

Yes.

Question 3

Upon settlement will $D, being the amount paid in consideration of your Y interest, be capital proceeds from the disposal of a CGT asset?

Answer

Yes.

Question 4

Will $E, being the amount to reimburse you for income protection insurance premiums and brokerage:

(a) Be assessable under section 6-5 of the ITAA 1997?

(b) Be assessable under subdivision 20-A of the ITAA 1997?

(c) Be capital proceeds you receive from the disposal of a CGT asset?

Answer

(a) No.

(b) No.

(c) Yes.

Question 5

Will $F, being the amount to reimburse you for the loss in value of your superannuation balance:

(a) Be assessable under section 6-5 of the ITAA 1997?

(b) Be assessable under subdivision 20-A of the ITAA 1997?

(c) Reduce the cost base of your CGT asset?

Answer

(a) No.

(b) No.

(c) Yes.

Question 6

Will $G, being the amount to reimburse you for a review fee and car loan commissions:

(a) Be assessable under section 6-5 of the ITAA 1997?

(b) Be assessable under subdivision 20-A of the ITAA 1997?

(c) Be capital proceeds you receive from the disposal of a CGT asset?

Answer

(a) No.

(b) No.

(c) Yes.

Question 7

Will $H, being the amount to reimburse you for commissions paid without your knowledge:

(a) Be assessable under section 6-5 of the ITAA 1997?

(b) Be assessable under subdivision 20-A of the ITAA 1997?

(c) Be capital proceeds you receive from the disposal of a CGT asset?

Answer

(a) No.

(b) No.

(c) Yes.

Question 8

Will $J, being the amount to reimburse you for trauma and permanent disability insurance paid on an inappropriate superannuation account:

(a) Be assessable under section 6-5 of the ITAA 1997?

(b) Be assessable under subdivision 20-A of the ITAA 1997?

(c) Be capital proceeds you receive from the disposal of a CGT asset?

Answer

(a) No.

(b) No.

(c) Yes.

Question 9

Will $K, being the amount to reimburse your accountancy fees in preparing information for this settlement:

(a) Be assessable under section 6-5 of the ITAA 1997?

(b) Be assessable under subdivision 20-A of the ITAA 1997?

(c) Be capital proceeds you receive from the disposal of a CGT asset?

Answer

(a) No.

(b) No.

(c) Yes.

This ruling applies for the following period:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2003

Relevant facts and circumstances

Some years ago you invested in three agribusiness schemes - Scheme 1, Scheme 2, and Scheme 3 - on the advice of your financial planner at the time, referred to herein as the Former Advisor.

In a particular year the responsible entity for Schemes 2 and 3 went into liquidation. Since then the liquidator has sold trading stock from across the projects and has made cash distributions to you in proportion to your interests.

You began to pursue claims against the Former Advisor. You have requested that the amount you receive (the Settlement Amount) return you to your financial position which existed prior to your investment in any of these agribusiness projects. You have notionally calculated the Settlement Amount based on the actual out-of-pocket costs to you of investing in these schemes, as well as some other outgoings and losses you believe to have been caused by the Former Advisor's advice. Your calculations arriving at the Settlement Amount were provided.

Aside from the agribusiness investments, the expenses mentioned were incurred during a time when you were self employed and conducting a business. You have asked the Commissioner to clarify the taxation treatment of the Settlement Amount and the transactions that comprise your settlement, in order to avoid future claims arising out of unforseen taxation treatments.

Assumptions

Following consultation you have asked the Commissioner to rule on the assumption of the following settlement terms:

· The Former Advisor will pay you the Settlement Amount as full satisfaction of the matters addressed.

· You and the Former Advisor agree to apportion the Settlement Amount among the separate heads of claim as calculated here.

· You will surrender your remaining agribusiness interests to the Former Advisor.

· You agree not to pursue further action against the Former Advisor in relation to the matters addressed.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 82KZMGA

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subdivision 20-A

Income Tax Assessment Act 1997 subsection 20-30(1)

Income Tax Assessment Act 1997 section 70-10

Income Tax Assessment Act 1997 section 70-85

Income Tax Assessment Act 1997 section 70-90

Income Tax Assessment Act 1997 subsection 70-90(1)

Income Tax Assessment Act 1997 subsection 70-90(2)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 110-45(2)

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 118-25

Income Tax Assessment Act 1997 section 118-305

Income Tax Assessment Act 1997 subsection 118-305(2)

Income Tax Assessment Act 1997 subsection 118-305(3)

Income Tax Assessment Act 1997 subdivision 152-C

Income Tax Assessment Act 1997 subdivision 152-D

Income Tax Assessment Act 1997 subdivision 152-E

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Issue 1 Question 1

Summary

If you surrender your interest in Scheme 1 before its completion, will there be a CGT event under Part 3-1 of the ITAA 1997?

Answer

Yes.

Detailed reasoning

Your entire interest in the Scheme 1 project is a CGT asset within the definition of section 108-5 of the ITAA 1997, and disposing of it will trigger a CGT event. A taxation liability will arise if there is a capital gain - where the capital proceeds from the disposal exceeds the cost base of the interest.

Calculating the cost base

The cost base is what you had to pay to acquire the interest, and also includes amounts you spent to maintain or increase its value. However it does not include any amount that is deductible to you (subsection 110-45(2) of the ITAA 1997). Outgoings incurred by a typical grower in this project, for example establishment fees and rent of the land, are deductible. If all of your expenditure towards the project has been deductible, the cost base of your interest will be zero.

Calculating the capital proceeds

Capital proceeds refers to money or property you are entitled to receive for your Scheme 1 interest. Based on your settlement terms the Commissioner considers that $B is the capital proceeds for disposal.

Avoiding double taxation

You should be aware that your interest in the Scheme 1 project includes the trees, which will be assessed elsewhere (see Issue 1 Question 2). To avoid double taxation, any capital gain should reflect the disposal of everything in your business minus the trees.

Section 118-25 of the ITAA 1997 states that a capital gain or loss on disposal of trading stock is to be disregarded. You will need to determine, on a reasonable basis, what part of your capital gain relates to the disposal of trees, and remove this amount from your capital gain.

Acquisition date

For CGT purposes it is relevant to determine the date you acquired the asset - refer to Other Matters for an explanation on why. The acquisition date in this case is the date you started to own the interest.

Issue 1 Question 2

Summary

If you surrender your interest in the Scheme 1 project before its completion, will you be assessed on the market value of any trading stock you had under subsection 70-90(1) of the ITAA 1997?

Answer

Yes.

Detailed reasoning

As a grower in Scheme 1, you are regarded as carrying on a business of afforestation. Under subsection 70-90(1) of the ITAA 1997, if you dispose of trading stock outside the ordinary course of your business, you will be assessed on the market value of that trading stock.

The term trading stock generally refers to anything a business holds for sale (section 70-10 of the ITAA 1997), which your trees are. Even if they have not yet matured they are still trading stock by virtue of section 70-85 of the ITAA 1997.

Giving up your trees as part of a dispute resolution before they have matured is outside the ordinary course of an afforestation business. You will be assessed on the market value at the time of surrender, which will likely be when you execute the settlement deed. The market value of trading stock is a question of fact that must be determined on a case by case basis by examining a number of variables and may require a formal valuation. Therefore, as a formal valuation has not been done, the Commissioner is unable to rule on the actual market value of your trees based on the information provided. Because you include the market value of the trees in your assessable income you can ignore the amount you actually received in relation to the trees (subsection 70-90(2) of the ITAA 1997).

Issue 2 Question 1

Summary

If you surrender your interest in Scheme 2 before it is wound up, will there be a CGT event under Part 3-1 of the ITAA 1997?

Answer

Yes.

Detailed reasoning

Your entire interest in Scheme 2 is a CGT asset within the definition of section 108-5 of the ITAA 1997, and disposing of it will trigger a CGT event. A taxation liability will arise if there is a capital gain - where the capital proceeds from the disposal exceeds the cost base of the interest.

Calculating the cost base

For a typical grower the outgoings they incur in respect of the project, for example establishment fees and rent of the land, are deductible. If all of your expenditure towards the project has been deductible, the cost base of your interest will be zero.

Calculating the capital proceeds

Based on your settlement terms the Commissioner considers that $C is the capital proceeds for disposal.

Acquisition date

The acquisition date in this case is the date you started to own the interest.

Issue 2 Question 2

Summary

If a liquidator, in the process of winding up Scheme 2, sells your trading stock, will you be assessed on the market value of that trading stock under subsection 70-90(1) of the ITAA 1997?

Answer

Yes.

Detailed reasoning

As a grower in Scheme 2 you are conducting an afforrestation business, and as explained in Issue 1 Question 2 you will be assessed on the market value of any trading stock disposed of outside your ordinary course of business. The case of FC of T v St Hubert's Island Pty Ltd 78 ATC 4104 showed that the same treatment will apply if a liquidator disposes of trading stock for you as part of proceedings.

The letters sent to you from the liquidator indicate that your trees were sold along with trees from across other forestry projects on the particular date, and your share of proceeds was $L. Although the liquidator has determined the amount you are entitled to, taxation law intends to assess you on the market value of your trees.

The market value of the trees is a question of fact that can only be determined by examining a number of variables and may require a formal valuation. Because a formal valuation has not been completed the Commissioner is unable to rule on the actual market value of your trees based on the information provided. However, we offer the following general guidance to assist you in preparing your income tax return.

In this case the trees were sold in an arms length transaction, and the proceeds were apportioned to growers on a basis approved by a court. The Commissioner accepts that it would be reasonable to adopt the share of proceeds you are entitled to, as advised by the liquidator, as the market value of the trees you held.

It may be the case that you actually receive less than your share of proceeds because:

· the liquidator took some of your proceeds as fees; or

· the liquidator took some of your proceeds to offset an outstanding loan.

You should ensure that the gross entitlement is included in your assessable income, as this is the amount that is representative of market value. An amount taken from your proceeds to pay fees is tantamount to you paying them yourself - so if such fees are deductible to you, you can claim them if you have not already done so.

It is also possible that in the future the liquidator will determine that you are entitled to further amounts from the sale. Should this happen after you lodge, you should request an amendment to your recent year income tax return to include this additional entitlement as soon as it is determined. Please attach a copy of this notice with your request for amendment.

If you do not agree with this view you may obtain an alternative valuation at your expense, conducted by a suitably experienced and qualified valuer. Alternatively, you can ask the Commissioner to determine the market value of your trading stock as contemplated under subsection 70-90(1) of the ITAA 1997 via a private ruling request. Please note that the Commissioner may need to refer to a valuer to conduct a formal valuation, for which you may be charged a fee.

Issue 3 Question 1

Summary

If you surrender your interest in Scheme 3 before it is wound up, will there be a CGT event under Part 3-1 of the ITAA 1997?

Answer

Yes.

Detailed reasoning

Your entire interest in Scheme 3 is a CGT asset within the definition of section 108-5 of the ITAA 1997, and disposing of it will trigger a CGT event. A taxation liability will arise if there is a capital gain - where the capital proceeds from the disposal exceeds the cost base of the interest.

Calculating the cost base

For a typical grower the outgoings they incur in respect of the project, for example establishment fees and rent of the land, are deductible. If all of your expenditure towards the project has been deductible, the cost base of your interest will be zero.

Calculating the capital proceeds

Based on your settlement terms the Commissioner considers that $D is the capital proceeds for disposal.

Acquisition date

The acquisition date in this case is the date you started to own the interest.

Issue 3 Question 2

Summary

If a liquidator, in the process of winding up Scheme 3, sells your trading stock, will you be assessed on your sales proceeds under section 6-5 of the ITAA 1997?

Answer

Yes.

Detailed reasoning

The letters sent to you from the liquidator indicate that your crops were harvested and sold some time in the recent income year, and your share of proceeds was $N

Although this is a liquidator's distribution similar to the Scheme 2 distribution, the Commissioner regards that the selling of crops in this case was within the ordinary course of business. This is because the harvest of crops was not premature the disposal followed normal growing timetables (specified in the relevant product ruling). Accordingly you will be assessed under the 'ordinary' income provision of section 6-5 of the ITAA on $N at the time you derive the amount.

Issue 4 Question 1

Summary

Upon settlement will $B, being the amount paid in consideration of your Scheme 1 interest, be capital proceeds from the disposal of a CGT asset?

Answer

Yes.

Detailed reasoning

Based on your settlement terms the Commissioner considers that this amount is paid in consideration of your interest in Scheme 1. It will be treated in the manner described in Issue 1 Question 1.

Issue 4 Question 2

Summary

Upon settlement will $C, being the amount paid in consideration of your Scheme 2 interest, be capital proceeds from the disposal of a CGT asset?

Answer

Yes.

Detailed reasoning

Based on your settlement terms the Commissioner considers that this amount is paid in consideration of your interest in Scheme 2. It will be treated in the manner described in Issue 2 Question 1.

Issue 4 Question 3

Summary

Upon settlement will $D, being the amount paid in consideration of your Scheme 3 interest, be capital proceeds from the disposal of a CGT asset?

Answer

Yes.

Detailed reasoning

Based on your settlement terms the Commissioner considers that this amount is paid in consideration of your interest in Scheme 3. It will be treated in the manner described in Issue 3 Question 1.

Issue 4 Question 4

Summary

Will $E, being the amount to reimburse you for income protection insurance premiums and brokerage:

(a) Be assessable under section 6-5 of the ITAA 1997?

(b) Be assessable under subdivision 20-A of the ITAA 1997?

(c) Be capital proceeds you receive from the disposal of a CGT asset?

Answer

(a) No.

(b) No.

(c) Yes.

Detailed reasoning

The amount will not be assessable income under subdivision 20-A of the ITAA 1997 because the table in subsection 20-30(1) does not capture it. However, it may still be assessable under section 6-5 of the ITAA 1997 if the amount is income according to 'ordinary' concepts.

The cases of HR Sinclair Pty Limited v FC of T (1966) 114 CLR 537 (Sinclair) and Warner Music Australia Pty Ltd v FC of T (1996) 70 FCR (Warner) established a number of principles that guide when a recoupment of previously deducted business expenses is ordinary income to that business:

· the taxpayer recouped the expense in the same business capacity in which they originally paid it (Sinclair at CLR 544);

· the original expense was 'intimately connected' with the taxpayer's business (Warner at FCR 221);

In both cases the court found such recoupments assessable - but not because they were previously deducted.

Payment more akin to a settlement

The court's finding in Sinclair that the recoupment was assessable was reached by, crucially, rejecting the proposition that the amount was a settlement of claims, as Owen J states at CLR 543-4:

There was a suggestion that the payment was made and received not merely as a voluntary refund but by way of compromise of past and future claims. In my opinion, however, there is no substance in this suggestion; the payment represents no more than a voluntary refund of part of the royalties which had been legally exacted.

In contrast to Sinclair, the case of FC of T v Rowe (1997) 143 ALR 406 (Rowe) is an example of where a recoupment of expenses previously deducted is not assessable income because it had the character of a settlement rather than income:

The payment was in no sense a reward for his services during his employment by the Council… It was a recognition of the wrong done to him, and also of the fact that he had been forced to shoulder the task of sharing in an Inquiry undertaken by the government for public purposes. The payment was not a remuneration, but a reparation.

Although the original expenditure in Rowe was relevant to the production of the taxpayer's employment income and rightly deducted, its recoupment was found too far removed from such production - hence best described as something other than income. These outcomes suggest that where a recoupment can properly be described as a payment for damages or other claims, the recoupment will not be ordinary income.

Connection to business

In Sinclair and Warner it was emphasised that attempts by a business to avoid overpaying royalties or sales tax were themselves businesslike activities, and gains from these attempts are to have the mark of ordinary income. In Warner it was found that a gain made in being released from having to pay sales tax was so 'intimately connected' to the business of a retailer that it had to be income.

Your situation can be differentiated from those cases on two points. Firstly there is nothing to suggest that, although you were self-employed and conducting several businesses at the time, income protection premiums have the same trade purpose to any of your businesses in the way that logging royalties have to a sawmiller or sales taxes have to a retailer.

Secondly your effort to recoup the premiums cannot be said to be businesslike. The pursuit is part of a broader claim for compensation for improper advice received by you generally, and the motivation for it lacks the direct connection to business demonstrated in Sinclair and Warner.

Treatment as a capital receipt

The amount paid to you is best described as a settlement of claims rather than assessable income, and will therefore be treated as a capital receipt in line with Taxation Ruling TR 95/35. As explained at paragraph 70 of TR 95/35 the Commissioner adopts a 'look-through' approach to attribute the amount to the most appropriate asset and treat it in a way that reflects its commercial purpose.

Pursuant to paragraph 11 of TR 95/35 the asset being disposed of is your right to seek compensation from the Former Advisor on this matter. This right is a CGT asset and its disposal will attract CGT consequences. The cost base of the asset which, following paragraph 104 of TR 95/35, would normally be the amount you paid under the policy - $E. However, because what you paid for the policy was deductible to you, subsection 110-45(2) of the ITAA 1997 will reduce the cost base of the asset to nil.

The acquisition date for this asset is when you first began paying the premium or brokerage.

Issue 4 Question 5

Summary

Will $F, being the amount to reimburse you for the loss in value of your superannuation balance:

(a) Be assessable under section 6-5 of the ITAA 1997?

(b) Be assessable under subdivision 20-A of the ITAA 1997?

(c) Reduce the cost base of your CGT asset?

Answer

(a) No.

(b) No.

(c) Yes.

Detailed reasoning

Pursuant to TR 95/35 the amount will not be assessable income under subdivision 20-A or section 6-5 of the ITAA 1997 for reasons outlined in Question 4, and instead will be treated as a capital receipt.

This amount has the purpose of compensating you for damage suffered to an asset that you own - being your right to receive superannuation monies - caused by the Former Advisor. Paragraph 6 of TR 95/35 specifies that the amount is a recoupment of costs you paid to acquire your asset, reducing its cost base. Ordinarily this would increase the capital gains tax payable when you realise the asset - i.e. when you 'cash out' your superannuation.

However, because superannuation is typically taxed throughout its lifetime by other provisions, it is shielded from the capital gains tax regime by section 118-305 of the ITAA 1997. By virtue of that section your superannuation can never give you a capital gain, subject to one minor caveat in subsection 118-305(2) and (3). Provided the caveat does not apply to you, this amount will not affect your tax position even when you 'cash out' your superannuation entitlements.

Issue 4 Question 6

Summary

Will $G, being the amount to reimburse you for a review fee and car loan commissions:

(a) Be assessable under section 6-5 of the ITAA 1997?

(b) Be assessable under subdivision 20-A of the ITAA 1997?

(c) Be capital proceeds you receive from the disposal of a CGT asset?

Answer

(a) No.

(b) No.

(c) Yes.

Detailed reasoning

Pursuant to TR 95/35 the amount will not be assessable income under subdivision 20-A or section 6-5 of the ITAA 1997 for reasons outlined in Question 4, and instead will be treated as a capital receipt.

As in Question 4, this amount has the character of being capital proceeds paid for you to surrender your right to seek compensation on this matter. As the amount, in reality, relates to two distinct matters - one being the annual review and the other being the car commission - there are two CGT assets being disposed of rather than one. You will need to apportion the capital proceeds and cost base among those assets accordingly, remembering to reduce the cost base if any amount that forms it was deductible. The relevant acquisition date for each asset respectively is the date you paid, or started to pay, the amount in question.

Issue 4 Question 7

Summary

Will $H, being the amount to reimburse you for commissions paid without your knowledge:

(a) Be assessable under section 6-5 of the ITAA 1997?

(b) Be assessable under subdivision 20-A of the ITAA 1997?

(c) Be capital proceeds you receive from the disposal of a CGT asset?

Answer

(a) No.

(b) No.

(c) Yes.

Detailed reasoning

Pursuant to TR 95/35 the amount will not be assessable income under subdivision 20-A of the ITAA 1997 or section 6-5 of the ITAA 1997 for reasons outlined in Question 4, and instead will be treated as a capital receipt.

As in Question 4, this amount has the character of being capital proceeds paid for you to surrender your right to seek compensation on this matter. The cost base is $H (minus any amount that was deductible to you) and the relevant acquisition date is the date you paid the commission.

Issue 4 Question 8

Summary

Will $J, being the amount to reimburse you for trauma and permanent disability insurance paid on an inappropriate superannuation account:

(a) Be assessable under section 6-5 of the ITAA 1997?

(b) Be assessable under subdivision 20-A of the ITAA 1997?

(c) Be capital proceeds you receive from the disposal of a CGT asset?

Answer

(a) No.

(b) No.

(c) Yes.

Detailed reasoning

Pursuant to TR 95/35 the amount will not be assessable income under subdivision 20-A or section 6-5 of the ITAA 1997 for reasons outlined in Question 4, and instead will be treated as a capital receipt.

As in Question 4, this amount has the character of being capital proceeds paid for you to surrender your right to seek compensation on this matter. The cost base is $J (minus any amount that was deductible to you) and the relevant acquisition date is the date you began paying the premiums.

Issue 4 Question 9

Summary

Will $K, being the amount to reimburse your accountancy fees in preparing information for this settlement:

(a) Be assessable under section 6-5 of the ITAA 1997?

(b) Be assessable under subdivision 20-A of the ITAA 1997?

(c) Be capital proceeds you receive from the disposal of a CGT asset?

Answer

(a) No.

(b) No.

(c) Yes.

Detailed reasoning

Pursuant to TR 95/35 the amount will not be assessable income under subdivision 20-A or section 6-5 of the ITAA 1997 for reasons outlined in Question 4, and instead will be treated as a capital receipt.

As in Question 4, this amount has the character of being capital proceeds paid for you to surrender your right to seek compensation on this matter. The cost base is $K (minus any amount that was deductible to you) and the relevant acquisition date is the date you incurred the liability to pay the fees.

Issue 4 Question 10

Summary

If an amount received for the disposal of an asset includes a 'taxation adjustment', will that adjustment constitute capital proceeds for that asset within the meaning of section 116-20 of the ITAA 1997?

Detailed reasoning

If the Settlement Amount includes a 'taxation adjustment' - which is a 'top-up' calculated to cover any income tax liability that may arise in from receipt of compensation - the Commissioner regards this as much a part of disposal consideration as the compensation component itself (paragraph 93, 253 of TR 95/35).

Other matters

50 percent CGT discount and other concessions

If you make a capital gain on a CGT asset you held for at least one year (from the date you acquired the asset to the date you disposed of it), that gain will be a discount capital gain under section 115-25 of the ITAA 1997. Depending on what other capital gains and losses you have, you may be able to reduce your tax liability from that gain by 50 percent.

You may also be eligible for the CGT small business concessions contained in Subdivision 152-C, 152-D, and 152-E of the ITAA 1997. These concessions fall outside the scope of this ruling, but you can perform a search for 'small business concessions' at our website www.ato.gov.au for more information.

Payment in respect of any 'wrong, injury or illness suffered personally'

If you make a capital gain from compensation you receive for any 'wrong, injury or illness' you suffer personally, that capital gain will be exempt under paragraph 118-37(1)(a) of the ITAA 1997. The Commissioner believes that none of the amounts described here will fall into that exemption. The Explanatory Memorandum to the Income Tax Assessment Act (Capital Gains) Bill 1986 indicates that the provision, as originally drafted, was intended to include "damages for personal injuries or for libel, slander or defamation, and insurance monies under personal accident policies."

Retaining your agribusiness deductions

As stated in the relevant product rulings, the Commissioner has allowed you to claim deductions under various sections of the tax Acts for expenses you incur in running agricultural businesses. This comes with some conditions, one being that you enter the projects with a bona fide intention to remain until their completion and generate a profit.

You propose to prematurely dispose of your interest in the agribusiness schemes as part of a wider settlement to 'undo' the financial positions recommended to you by the Former Advisor, which you believe to be unsuitable. This, on its own, will not cause the Commissioner to find that you lacked the requisite intention, having regard to the following factors:

· your intention is to exit the project which you entered because of unsuitable advice;

· there is no evidence that at the time of entering the projects you intended to exit had the tax benefits from the project not been allowed; and

· there is no evidence that you intended to exit once you had claimed the up-front deductions, or before you returned assessable income.

Further the Commissioner's power to remove deductions claimed for forestry projects under section 82KZMGA of the Income Tax Assessment Act 1936 (ITAA 1936) only applies if you dispose of your interest within four years of starting to hold it. Because you will be disposing of your interests past the four year period, the Commissioner will not disallow your deductions claimed under section 82KZMGA of the ITAA 1936.

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