Edited version of your private ruling

Authorisation Number: 1012058418289

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Subject: Capital gains tax - Compensation for withdrawing offer of employment

Question:

Is the compensation payment you received from your prospective employer as a result of them withdrawing their offer of employment assessable as a capital gain?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

A Corporation offered you a job as a business analyst after 20 September 1985 and you formally accepted this offer a short time later.

The Corporation subsequently determined that the position was surplus to their requirements and made the position redundant.

You received a sum of money pursuant to the terms of the settlement deed.

You have provided a copy of the following document, which forms part of, and should be read in conjunction with this private ruling:

Settlement deed between you and the Corporation.

You received a sum of money pursuant to the terms of the settlement deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Subsection 115-25(1)

Reasons for decision

The right to enforce a contractual obligation is a capital gains tax (CGT) asset under section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Releasing another party from their contractual obligation is an example of CGT event C2 occurring. (section 104-25 of the ITAA 1997)

The compensation payment that you received from your prospective employer as a result of them withdrawing their offer of employment is assessable as a capital gain because the termination of your employment contract was a CGT event C2.

You will have a capital gain if the capital proceeds (section 116-20 of the ITAA 1997 defines this as the sum you received) are more than the cost base of any expenses you incurred to enforce the contractual obligation.

 The cost base of the employment contract can include the cost of acquisition of the right, incidental costs incurred in acquiring the right, incidental costs incurred in releasing the employer from their obligations under the right, any non-capital costs of ownership of the right, expenses incurred to enhance the value of the right or expenses incurred to establish, preserve or defend your right. (section 110-25 of the ITAA 1997) However, any expenses that you can claim a deduction for cannot be included in the cost base. (section 110-45 of the ITAA 1997)

The capital gain is not a discount capital gain because you acquired the CGT recently and this period of time is less than 12 months before CGT event C2 occurred. (subsection 115-25(1) of the ITAA 1997)

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