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Edited version of your written advice
Authorisation Number: 1012814646481
Ruling
Subject: Discount capital gains tax
Question
Can you apply the 50% capital gains tax discount to the capital gain from the compensation payment?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commences on:
1 July 2013
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.
You and your spouse incurred substantial capital losses in relation to shares/options trading.
You and your spouse received compensation during the 2013-14 financial year.
All shares holdings that were held were sold in full in the 2012-13 financial year.
You and your spouse engaged a solicitor during the 2012-13 financial year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20.
Income Tax Assessment Act 1997 Subsection 104-25(3).
Income Tax Assessment Act 1997 Section 108-5.
Reasons for decision
Taxation Ruling TR 95/35 provides the Commissioner's view on the capital gains tax (CGT) consequences of a compensation receipt. It adopts a look through approach to determine if the compensation relates to an underlying asset. Paragraph 3 defines and underlying asset as:
The underlying asset is the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity.
Paragraph 11 of TR 95/35 provides that if the compensation is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.
You and your spouse received a compensation payment in relation to capital losses incurred on shares/options trading undertaken on your behalf. We consider the relevant asset is the right to be compensated for the capital losses that were incurred. This right was surrendered when you were paid the compensation payment.
Paragraph 104-25(1)(d) of the ITAA 1997 provides that CGT event C2 happens when your ownership of an intangible CGT asset ends by the asset being abandoned, surrendered or forfeited. Consequently the compensation payment will represent capital proceeds of a CGT event C2 which occurred when you received the payment.
You can use the discount method to calculate your capital gain if:
• you are an individual, a trust or a complying superannuation entity
• a CGT event happens to an asset you own
• the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999
• you acquired the asset at least 12 months before the CGT event, and
• you did not choose to use the indexation method.
In this case we accept that you and your spouse have held the relevant right for at least 12 months. Therefore, you and your spouse are entitled to apply the 50% discount.
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