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Edited version of your written advice
Authorisation Number: 1012780616988
Ruling
Subject: Compensation payment superannuation benefits dispute
Questions and Answers:
1. Is your compensation receipt capital in nature and therefore not assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes.
2. Is your compensation receipt exempt from capital gains tax under paragraph 118-37(b) of the ITAA 1997 as compensation for a "wrong" suffered by you personally?
No.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
Prior to 20 September 1985, you commenced employment with the employer.
After 20 September 1985, based on information received by your employer, you elected to change your superannuation benefits scheme from a defined benefit fund to an accumulation fund.
At a later date, your employment ended, upon which you developed the view that your superannuation benefit would have been significantly higher if you remained in the defined benefit fund.
At a later date, you commenced proceedings against the employer and the relevant superannuation fund.
During the year ended 30 June 2015, over 12 months after you commenced the relevant proceedings, you entered into a deed of release with the respondents, from which you received compensation and where the "parties…agreed to settle the Proceedings and the Dispute, on a without costs or admissions basis" and where the compensation amount was not calculated with reference to any specific heads of damages.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-25
Income Tax Assessment Act 1997 Section 115-25
Income Tax Assessment Act 1997 Section 118-20
Income Tax Assessment Act 1997 Section 118-37
Reasons for decision
Section 118-37 of the ITAA 1997 states a capital gain or capital loss you make from a CGT event relating directly to any of these is disregarded:
(a) compensation or damages you receive for any wrong or injury you suffer in your occupation;
(b) compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally…
The Explanatory Memorandum to Income Tax Assessment Amendment (Capital Gains) Bill 1986, which introduced the former subsection 160ZB(1), the precursor equivalent to section 118-37, states:
Sub-section 160ZB(1) refers to compensation or damages awarded for any wrong or injury suffered by a taxpayer to his or her person or in his or her vocation…. Within this category are damages for personal injuries or for libel, slander or defamation, and insurance monies under personal accident policies.
Taxation Ruling TR 95/35 is about capital gains and the treatment of compensation receipts. About the arising and ending of a right to seek compensation, paragraphs 3 and 18 of TR 95/35 state:
The right to seek compensation is the right of action arising at law or in equity and vesting in the taxpayer on the occurrence of any breach of contract, personal injury or other compensable damage or injury. A right to seek compensation is an asset…. The right to seek compensation is acquired at the time of the compensable wrong or injury, and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged.
An undissected lump sum compensation receipt is any amount of compensation received by the taxpayer where the components of the receipt have not been and cannot be determined or otherwise valued or reasonably estimated.
If the amount of compensation received is an undissected lump sum, the whole amount is treated as being consideration received for the disposal of the right to seek compensation.
For certain CGT events, including CGT event C2 (the ending of an asset), section 115-25 of the ITAA 1997 allows a discount capital gain where the capital gain results from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event. The discount percentage is 50% (section 115-100 of the ITAA 1997).
Also, the anti-overlap provision in section 118-20 of the ITAA 1997 reduces any capital gain by amounts that are otherwise assessable as a result of the event.
About superannuation contributions, Taxation Ruling TR 2010/1 describes them as contributions to the "capital" of a superannuation fund.
In your case, your compensation receipt is not exempt under section 118-37 of the ITAA 1997 because it is not related to any wrong you suffered that had the nature of personal injuries, libel, slander, defamation or insurance monies under personal accident policies. Instead, your compensation receipt was related to a wrong of a financial or economic nature, namely, the quantum of capital in your superannuation fund. Ultimately, your compensation was capital proceeds for your ending of your right to seek compensation (CGT event C2) because it was settled without admission and because its components cannot be determined with reference to specific heads of damages.
It follows your gain is not assessable as ordinary income, including under the anti-overlap provision in section 118-20, given superannuation contributions are capital in nature (per TR 2010/1). Your capital gain is discountable under section 115-25 of the ITAA 1997.
Your right to seek compensation was not a pre-CGT asset since it arose when you became aware of the wrong. Even if your right to seek compensation was related when you received the information from your employer about the accumulated benefits fund, it is not related to your commencement of employment since, from that time until a time after 20 September 1985 you were in the defined benefit fund therefore no economic or contractual wrong had occurred against you.
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