Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012119110488

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.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Subject: Settlement Payment

Question

Is the Payment made under the Deed assessable income?

Answer

Yes. The Payment should be included in assessable income as part of any net capital gain.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The taxpayer and Company X have previously entered into a number of Agreements. As a result of these Agreements, the taxpayer held the exclusive right to act as Company X's agent and promote their products in a defined area.

The taxpayer alleged that Company X wrongfully repudiated the Agreements and that it has suffered consequential loss and damage. Company X denied these allegations and they entered into a Deed to resolve this matter and to formally terminate the existing Agreements.

Under the Deed, a payment was made to the taxpayer.

In accordance with the Deed, upon the payment being made, the taxpayer irrevocably released and discharged Company X from any demands, claims, or suits it has, had or may in the future have against Company X, including in respect of any damage or loss that they have suffered or incurred or may suffer or incur in the future arising out of the Agreements or agency relationship.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-1

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-10

Income Tax Assessment Act 1997 Section 102-25

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 108-5

Reasons for decision

Pursuant to subsection 6-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) assessable income consists of ordinary income and statutory income.

Ordinary income is income according to ordinary concepts (section 6-5 of the ITAA 1997). Statutory income (section 6-10 of the ITAA 1997) includes in assessable income some amounts that are not ordinary income. Relevantly, section 10-5 of the ITAA 1997 includes capital gains in statutory income.

The courts have identified a number of factors which indicate whether an amount has the character of income. A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity. However these characteristics are not always essential as in some circumstances proceeds from an isolated transaction received as a lump sum may also be income

ATO Interpretative Decision ATO ID 2003/105 considers whether an amount received by a taxpayer, for the termination of an agreement to provide services, is assessable as income according to ordinary concepts.

ATO ID 2003/105 considers that the amount received is only of an income nature if the amount which it replaces would have been income.

The taxpayer has previously entered into a number of Agreements with Company X to hold exclusive rights to act as their agent and promote certain products.

The Company entered into a Deed with Company X to resolve a dispute which had arisen between the parties. This Deed provided for a Payment to be received by the taxpayer.

Under the Deed, it can be seen that the Payment is, in effect, the taxpayer giving up their rights to make any demands, claims, or suits in respect of the prior Agreements.

Therefore, it can be seen that the Payment is not an amount which would have replaced ordinary income as the Payment is for the surrender of the taxpayer's rights under the previous Agreements it had entered into.

A legal or equitable right is a CGT asset pursuant to section 108-5 of the ITAA 1997.

Subsection 102-25(1) of the ITAA 1997 provides that if more than one capital gains tax (CGT) event could happen, the taxpayer should use the one that is most specific to their circumstances.

As the taxpayer had an intangible asset, a contractual right which was surrendered upon entering the Deed, the Commissioner believes that the most appropriate CGT event in these circumstances would be CGT event C2, which is where the ownership of an intangible CGT asset ends by the asset:

Therefore, the Payment needs to be included as part of the taxpayer's calculation of its net capital gain or net capital loss (pursuant to sections 102-5 and 102-10 of the ITAA 1997).

If the taxpayer has a net capital gain for the year of income, this gain must be included in its assessable income.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).