Edited version of private advice

Authorisation Number: 1052171356177

Date of advice: 06 August 2024

Ruling

Subject: Capital Gains Tax - Administration

Issue 1 - AA compassionate payment

Question 1

Willthe compassionate payment you received from AA be assessable under section

6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income or under the capital gains tax provisions of the ITAA 1997 as statutory income?

Answer

The compassionate payment you received from AA will be assessable as a capital gain.

Question 2

Will the compassionate payment that is paid in respect of your investment reduce the cost base and reduced cost base of your investment?

Answer

No.

Issue 2 - First BB cryptocurrency payment

Question 3

Willthe first BB cryptocurrency payment in NN units of Ethereum you received reduce the cost base and reduced cost base of your original investment?

Answer

No.

Question 4

Will the NN units of Ethereum payment that you received form part of the separate cost base?

Answer

Yes.

Question 5

Willthe first BB cash payment paid in respect of your cash balance with BB be assessable income under section 6-5 of the ITAA 1997 as ordinary income or under the capital gains tax provisions as statutory income?

Answer

The first BB cash payment and the market value of any property received at the time represent capital proceeds of a CGT event and will be assessable under the capital gains provisions.

Issue 3 - Further BB cash payments

Question 6

Willthe amount of any further BB cash payments paid in respect of your remaining units of Ethereum reduce the cost base and reduced cost base of your investment?

Answer

No.

Question 7

Assuming the answers to any or all of Questions 2, 3 and 6 are 'Yes' and assuming the cost base and reduced cost base of your investment has been reduced to nil, will any further amount of the AA compassionate payment or further BB payments paid in respect to your investment result in a capital gain?

Answer

Not applicable. Question 2, 3 and 6 are all no, therefore this question is not applicable.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

28 September 20XX

Relevant facts and circumstances

You are a self-managed superannuation fund (SMSF) that manages its compliance obligation via AA, a digital platform that allows its clients to establish and administer their SMSF.

You invested in digital assets and fiat currency as part of your SMSF holdings.

You currently do not have any intentions to wind up your SMSF.

You currently do not have any intention to dispose of your investment.

Digital assets and fiat currency holdings

You deposited cash with BB in order to purchase digital assets and fiat currency.

You provided us with details on your investment with BB.

BB operated a digital asset and fiat currency exchange through its website whereby BB's clients could invest, trade, deposit and withdraw digital assets or fiat currency.

BB had a data sharing agreement with AA.

You provided us with details on that terms and conditions that you agreed to when you created an account with BB.

Administration of BB

On a specified date, BB entered into a broker agreement with CC.

On a specified date, BB transferred assets worth a specified amount to CC.

On a specified date, CC was placed into bankruptcy in the United States of America and CC's Australian entity was placed into voluntary administration.

On a specified date, BB announced the freezing of all deposits and withdrawal from the exchange but allowed trading on the exchange to continue.

On a specified date BB was placed into voluntary administration and trading on the exchange was suspended.

You provided details of the market value of your investment with BB on a specified date.

On a specified date, BB administrators released a report setting out options available for BB's future including details of a proposed Deed of Company Arrangement (DOCA).

On a specified date the DOCA was executed, and a creditors' trust was created. The DOCA was terminated, and the creditors' claim dealt with under the creditors' trust.

You provided us with a copy of the DOCA and Creditors' Trust Deed.

Payment expected to be received by you from the creditors trust

The DOCA outlines the distributions that are proposed for you to receive for your digital assets and fiat currency from BB.

First Distribution

You will receive a distribution/payment equal to a specified percentage of the value of your Ethereum balance and cash balance valued as of a specified date.

The payment was paid in the proportion of the Ethereum and cash held with BB on a specified date.

In accordance with the DOCA, the Ethereum allocated was based on the market price of Ethereum at the rebalance date of a specified date.

You received NN units of Ethereum and part of cash balance held with BB on a specified date.

Further distributions

Over the course of a specified number of years, further distribution may be made in satisfaction of the remaining amounts owing up to a maximum of a specified percentage of the value of the Ethereum and cash balance as of a specified date.

Any further distribution/payment in respect of the remaining units of Ethereum owing to you will be made in cash rather than Ethereum.

You provided us with details on the maximum amount that you will receive over the specified number of years.

The distributions will be paid to you in cash and are paid based on BB's financial performance and ability to produce net profit on a quarterly basis over the specified number of years and from the next proceeds of any distributions to BB from CC.

At the time of the private ruling request, you have not received any of the further distribution payments.

Payments to be received by you from AA

Due the financial impact on AA clients, AA proposed to make a compassionate payment to its clients providing you signed a Deed Poll of Release.

You provided us with details on the data that The Deed Poll of Release was executed.

You provided us with The Deed Poll of Release.

You provided us with the date that you received the compassionate payment (a one-off payment) from AA.

Assumptions

It is assumed that you are not prohibited from investing in digital assets and your investment meets the following criteria:

§  It is allowed under your trust deed,

§  it is in accordance with your investment strategy, and

§  complies with the same regulatory requirements as apply to other investments as set out in the Superannuation Industry (Supervision) Act 1993 (SISA) and Superannuation Industry Supervision Regulations 1994 (SISR).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 110-25

Detailed reasoning

Assessable income

Subsection 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Further, amounts which compensate for lost income or serve as a substitute for other income are themselves income according to ordinary concepts. However, if the compensation is paid for the loss of a capital asset or amount, then it will be regarded as a capital receipt and not ordinary income.

Statutory income

Amounts that are not ordinary income but as included in your assessable income by another provision are called statutory income (section 6-10 of the ITAA 1997).

The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Included in this list is section 102-5 (capital gains).

Capital gains tax provisions

You may make a capital gain or capital loss if a CGT event happens to a CGT asset (section 102-20 of the ITAA 1997).

A CGT asset includes legal or equitable rights that are not property (section 108-5 of the ITAA 1997).

Section 104-25 of the ITAA 1997 explains that CGT event C2 happens when the ownership or an intangible CGT asset ends by the asset being satisfied, surrendered or released. The timing of the event is when you enter into the contract that results in the asset ending or if there is no contract, when the asset ends.

Under CGT event C2, you will make a capital gain if the capital proceeds from the ending are more than the assets cost base. You will make a capital loss if those capital proceeds are less than the assets reduced cost base (section 104-25(3) of the ITAA 1997).

Section 116-20 ITAA 1997 provides that the capital proceeds from a CGT event are the total of any money received in respect of the event happening, and the market value of any other property received in respect of the event happening.

Subparagraph 116-30(2)(b)(ii) allows for the capital proceeds from a CGT event to be replaced with the market value of the CGT asset that is the subject of the event if those capital proceeds are more or less than the market value of the asset and the CGT event is CGT event C2 (about cancellation, surrender and similar endings).

Where the rights to part payments are part of a single CGT asset comprising the totality of the rights under a single contract, CGT event C2 happens to part of it at the time specified for each payment (other than the final payment). The seller's cost base for the part of the right to which the event happens is apportioned according to the formula in subsection 112-30(3). Under subsection 112-30(4), the remainder of the cost base after each payment is made attributed to the part of the asset that remains.

Where each right to a part payment under the agreement is a separate CGT asset, the seller is required to determine the cost base of each separate right when it is acquired. Under subsection 112-30(1), the first element of the cost base of each is that part of the expenditure that relates to its acquisition.

Division 109 of the ITAA 1997 sets out when you are taken to have acquired an asset for CGT purposes. In general, you acquire a CGT asset when you become its owner (subsection 109-5(1) of the ITAA 1997).

Compensation

To determine any CGT implications in relation to the compassionate payment you must establish the nature of the asset to which the compassionate payment relates.

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 damages or injury.

Taxation Ruling TR 95/35 (TR 95/35) provides the Commissioner's view on the application of the CGT provisions to compensation receipts. Paragraph 69 of TR 95/35 identifies three types of particular assets the compensation may be received for as follows:

1.    an underlying asset;

2.    a right to seek compensation; and

3.    a notional asset.

In TR 95/35 the Commissioner adopts an underlying asset approach, also known as a look-through approach, to the transaction or arrangement which generates the compensation receipt to determine the asset to which the compensation amount is most directly relate.

The initial question is whether there is an underlying asset to which the compensation has a direct and substantial link. This requires that there be an asset which has been disposed of and has come to an end, or which has been permanently reduced in value. Under this approach, where there is such an underlying asset which has been disposed of, the Commissioner will treat the compensation as consideration for that disposal.

Paragraph 18 of TR 95/35 outlines that 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.

TR 95/35 provides that this occurs when a taxpayer agrees to release, discharge, satisfaction or surrender of their right to seek compensation. This is generally at the final point of settlement of the claim, whether in the course of Court proceedings, or in an out of Court arrangement. The time of disposal is generally considered to be the timing of entering into the settlement agreement and receiving the compensation.

The cost base of the right to seek compensation includes the sum of money and the market value of the property given as consideration for the creation of the asset. If you incurred any legal expenses, they may be included in the cost base.

Issue 1 - AA compassionate payment

Question 1

Willthe compassionate payment you received from AA be assessable under section

6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income or under the capital gains tax provisions of the ITAA 1997 as statutory income?

Application to your circumstances

You received a one-off payment from AA, which bears none of the characteristics of ordinary income as it lacks any element of periodicity, recurrence, or regularity, and nor has it been paid to compensate you for loss of income; rather it is a payment received to surrender your right to seek compensation for loss on your digital assets.

Accordingly, the one-off lump sum payment you received from AA is a capital receipt and is therefore assessable as statutory income under section 102-5 of the ITAA 1997.

Question 2

Will the compassionate payment that is paid in respect of your investment reduce the cost base and reduced cost base of your investment?

Application to your circumstances

We have used the look through approach in relation to your situation and it is viewed that there is no underlying asset. The Deed Poll of Release in relation to the compassionate payment outlines that, the amount of compensation received as a lump sum constitutes payment in exchange for releasing and discharging AA from any legal claims due to your financial loss from BB. Therefore, the settlement amount relates to your right to seek compensation.

The compassionate payment you received from AA relates to your right to seek compensation as the payment was in exchange for your right not to take legal action against AA. Your right to seek compensation is a CGT asset and CGT event C2 occurred when the claim against AA was released.

The deed approving the compassionate payment amount was made and as a result you received the compassionate payment as a compensation payment, it is viewed that CGT event C2 occurred when the claim was released.

Under the Deed Poll of Release you agreed that the payment was final and full settlement of any and all claims you may have at any time. As the compassionate payment is an undissected lump sum, the whole amount is treated as being consideration received for the disposal of the right to seek compensation.

The cost base of the right to seek compensation includes the sum of money and the market value of the property given as consideration for the creation of the asset. As you did not pay anything to acquire the right to seek compensation, your total cost base will be nil plus any legal expenses incurred in relation to the claim.

Your capital proceeds that you received as a result of CGT event C2 occurring when you released your right to seek legal claims against AA.

As the compassionate payment from AA resulted in a CGT event, the payment will not reduce the cost base or reduced cost base of your investment.

Issue 2 - First BB cryptocurrency payment

Question 3

Willthe first BB cryptocurrency payment of NN units of Ethereum you received reduce the cost base and reduced cost base of your original investment?

Application to your circumstances

When the DOCA was terminated, BB were released from all claims you had against them. As a result, CGT event C2 happen to you on termination of the DOCA.

When you received the payment of NN units of Ethereum and part of the cash balance, CGT event C2 happened as your right to payment from the Creditors' Trust was partially satisfied. The capital proceeds of this event were the market value at the time of the CGT event on a specified date.

The payment consisting of NN units of Ethereum and a cash amount presents the proceeds for a single CGT asset and will not reduce the cost base or reduce cost base of your investment.

Question 4

Will the NN Ethereum payment that you received form part of the separate cost base?

Application to your circumstances

As explained at question 3, when you received the NN units of Ethereum a CGT event occurred as your right to payment from the Creditors' Trust was partially satisfied. The NN units of Ethereum you received is a new CGT asset which will have its own cost base. The market value of the Ethereum on the receipt date will form part of the cost base of the asset when you dispose of the asset in the future.

Question 5

Willthe first cash payment received in respect of your cash balance with BB be assessable income under either section 6-5 of the ITAA 1997 as ordinary income or under capital gains tax provisions as statutory income?

Application to your circumstances

As explained in question 3, CGT event C2 happened when you received NN units of Ethereum and the cash payment. This represents the proceeds for a single CGT asset which is your claim against the Creditors' Trust.

The capital proceeds of this event were the total of the cash payment and the market value of the Ethereum received at the time of the CGT event on a specified date.

The cash payment received will not be assessable under section 6-5 of the ITAA 1997, the total of the cash received and the market value of the Ethereum received at the time of the CGT event is statutory income and will be assessable under the capital gains provisions in section 102-5 of the ITAA 1997.

Issue 3 - Further BB cash payments

Question 6

Willthe amount of any further BB cash payments paid in respect of your remaining units of Ethereum reduce the cost base and reduced cost base of your investment?

Application to your circumstances

A separate CGT event C2 will happen when you receive each payment. The capital proceeds of the event will be the total of any of the following paid to you:

•         Australian dollar equivalent of fiat currency

•         market value of Ethereum or any property received at the date of the CGT event.

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