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Edited version of your written advice
Authorisation Number: 1012804739751
Ruling
Subject: Capital gains tax
Questions and answers
1. Are the proceeds you received as a result of a marriage breakdown settlement assessable as ordinary income?
No.
2. Are you entitled to disregard any capital gain or loss that resulted from the receipt of a marriage breakdown settlement amount under section 118-75 of the Income Tax Assessment Act 1997?
Yes.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You entered into an agreement in relation to the breakdown of your marriage under the Family Law Act 1975.
The terms of the agreement included the following:
• The family home was to be sold.
• You were removed as a beneficiary of a family related trust.
• You were entitled to receive a lump sum payment from your ex-spouse in final settlement of the agreement.
• In the event of the net sale proceeds of the family home not being sufficient to pay you out, you were entitled to receive monthly partial payments from your ex-spouse until they were in a position to pay you out in full.
You received several monthly payments from your ex-spouse which were followed by a final lump sum payment.
You intend to purchase a residence with the proceeds of the settlement.
You have been separated from your ex-spouse for several years.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 118-75
Reasons for decision
Your assessable income for an income year includes income according to ordinary concepts (ordinary income) and statutory amounts (such as capital gains) that are not ordinary income but are included in assessable income by another provision of the income tax legislation.
Ordinary income
Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.
Other characteristics of income that have evolved from case law include receipts that:
• are earned
• are expected
• are relied upon, and
• have an element of periodicity, recurrence or regularity.
Receipts that are capital in nature are not assessable as ordinary income.
In your case, you received a lump sum payment in final settlement of an agreement relating to your marriage breakdown. This payment is considered to be capital in nature.
The final payment was preceded by some advance partial payments which also related to the final settlement. Consequently, it is considered that the smaller payments formed part of the settlement and are also capital in nature.
Accordingly, the settlement amount you received is not ordinary income and is not included in your assessable income.
Statutory income
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you only make a capital gain or loss if a capital gains tax (CGT) event happens to a CGT asset.
Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends when the asset is released, discharged or satisfied.
When you entered into the agreement with your ex-spouse, you created a legally enforceable right to receive a lump sum payment. A legally enforceable right is an intangible CGT asset.
Section 118-75 of the ITAA 1997 provides that a capital gain or loss you make as a result of CGT event C2 happening is disregarded if:
a) you make the gain or loss in relation to a right that directly relates to the breakdown of a relationship between spouses; and
b) at the time of the CGT event:
i. you and your spouse or former spouse are separated; and
ii. there is no reasonable likelihood of cohabitation being resumed.
In your case, when you entered into the agreement in which your spouse would pay you a lump sum amount, you acquired a right to receive this amount. This right was an intangible CGT asset.
When you received the advance monthly payments, your ownership of the asset (the right) was partially released, discharged or satisfied. Therefore, CGT event C2 occurred when you received each of these payments.
When you received the final lump sum amount, your ownership of the asset ended by the asset being released, discharged or satisfied. Once again, CGT event C2 occurred.
Further, on final settlement, CGT event C2 also occurred when you gave up your right to receive income as a beneficiary of the trust.
However, as CGT event C2 occurred as a result of a marriage breakdown and you meet the conditions outlined under section 118-75 of the ITAA 1997, any capital gain or loss is disregarded.
Therefore, you are entitled to disregard any capital gain or loss that resulted from the receipt of the settlement amount.
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