Edited version of private advice

Authorisation Number: 1052391589003

Date of advice: 1 May 2025

Ruling

Subject: CGT - deceased estate

Issue 1 - Compensation to the estate

Question 1

Is the entire amount paid by the State of the overseas country to the Estate sometime in 20XX assessable income of the Estate for the purposes of calculating the net income of the Estate pursuant to section 95 of the ITAA 1936 for the 20XX income year?

Answer

No. Only that part which is attributable to interest receipts is assessable income of the Estate for the purposes of calculating the net income of the Estate for the 20XX income year.

Question 2

Is any part of the amount paid by the State of the overseas country to the Estate in the 20XX income year assessable income of the Estate for the purposes of calculating the section 95 net income of the Estate for the 20XX income year?

Answer

Yes. The part of the settlement amount that represents interest receipts forms part of the net income of the Estate in the 20XX income year.

Issue 2 - Distribution to individual beneficiary

Question 3

Is any of the amount distributed to you as a beneficiary of the Estate in the 20XX income year your assessable income pursuant to section 97 of the ITAA 1936?

Answer

Yes.

This private ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

20XX income year

Relevant facts and circumstances

You were a non-resident of Australia for tax purposes for a period sometime in 20XX to sometime in 20XX while you were living in an overseas country.

On your return to Australia sometime in 20XX, you became an Australian resident for tax purposes.

By a Will dated sometime in 20XX, your parent, appointed you as executor of their estate.

Shortly after you were appointed as executor of your parent's estate, a Justice of the Peace in the State of the overseas country that you had been a resident of, ordered the provisional guardianship of your parent and appointed person A as their provisional guardian. Shortly after person A acquired the effective management and control of your parent's assets and financial affairs as provisional guardian.

At all material times:

•   XXX was a corporation which carried on business in the overseas country that you had been a resident of as a wealth manager, investment adviser and legal and financial adviser in the field of property administration;

•   Person A was a director of XXX, the corporation for several years after person A was appointed your parent's guardian;

•   Person A was the majority shareholder of XXX for a few years before they were appointed your parent's guardian and for an unknown later period.

At the time person A took up their duties as the provisional guardian of your parent, the value of parent's financial portfolio (apart from real estate assets, which included their shares in a real estate company A and shares in another company B) was a considerable amount, which consisted of bank deposits, medium term bank notes, direct shares and corporate bonds.

Less than a year after person A was appointed your parent's guardian, you, by your lawyers, requested the Justice of the Peace in the State of the overseas country dismiss person A as provisional guardian on the grounds that systematic breaches of the regulations applicable to guardianship matters had been demonstrated by the unauthorised delegation of management to a third party company, by investments in non-guardianship assets without the authorisation of the Justice of the Peace, and other breaches in respect of the entry inventory provided by person A, which did not correspond with the state of your parent's assets on the day of person A's appointment as provisional guardian.

About a month later, the Justice of the Peace terminated the mandate of person A and appointed person B as the provisional guardian of your parent. Shortly after, person B acquired the effective management and control of your parent's assets and financial affairs as provisional guardian.

A few months later, person B and your parent, acting in the name of and on behalf of your parent, filed a criminal complaint against person A for unfair management, forgery in titles and other violations in respect of your parent's assets and financial affairs.

Not long after your parent died. You became the executor of their deceased estate, which vested in their spouse, and their children, which included yourself, as joint owners of the property of the estate. As your parent's sole legal heirs, you and the other beneficiaries formed a community in respect of all the rights and obligations of the estate (the Community of Heirs) in the succession of your late parent (the Succession), and you also thereby became jointly and severally liable for the debts of the deceased, in accordance with the laws of the overseas country and your parent's Will.

Shortly after, you and your siblings, commenced a civil action in the Civil Court of the State in the overseas country claiming damages for losses caused to the financial portfolio of your late parent by and against:

•   Person A for a considerable sum, with interest at a certain percent per annum from the date the civil action was commenced; and

•   Person A and XXX jointly and severally for a lesser amount with interest at a certain percent per annum from the date the civil action was commenced.

The civil action was commenced due to losses, the value of the financial portfolio had fallen significantly. Subsequently the difference between the actual portfolio management (value) and the hypothetical portfolio management value, had the management of the portfolio been undertaken in accordance with the State of the overseas country's regulations for the administration of guardianships, was determined to be certain significant sum.

Sometime after the civil action was commenced, a declaration of tax inventory for the estate of your late parent was prepared listing the sole legal heirs as their spouse and children, which included yourself, and their entitlements and reporting total net assets of a very significant sum, calculated at book value, and not market value.

All the gains and losses realised on the structured products acquired by person A and/or XXX from the time of their acquisition until their redemption, the last of which took place sometime in 20XX, resulted in a net loss of a large amount. Any gains and losses realised on other investments that had been acquired by person A and/or XXX for the financial portfolio of your late parent were realised either during the lifetime of your parent or before you returned to live in Australia.

Not long after in 20XX, distributions commenced to be made to the heirs of your late parent from the Estate:

•   By a Partial Inheritance Agreement, your parent's spouse left the Community of Heirs in exchange for an agreed distribution and the right to reside in the parental property, until their death.

•   By a Partial Inheritance Partition Agreement between the siblings, including yourself (the Community of Residual Heirs), agreed upon an initial division and distribution of your parent's estate.

About a month later in 20XX, a Certificate of Heredity was registered recording the sole legal heirs of the estate and you as the executor in accordance with the overseas country's laws and the Will of your late parent.

The Certificate of Heredity listed your parent's spouse and their children, which includes yourself as the sole legal heirs in the succession to your deceased parent (the Community of Heirs), named as follows:

•   the deceased parent's spouse

•   Child A

•   Child B

•   Child C

•   you.

A short time later by a Partial Inheritance Division Agreement, an agreement was reached between your siblings and you, by which:

•   you resigned and were replaced by Child C as executor in respect of the described assets of the succession and you were given a discharge as executor until the date of signing the agreement

•   you withdrew from the Community of Residual Heirs in respect of the described assets, which did not include the parental home, or the claims and criminal and civil litigation against person A

•   you received a distribution in the succession of a certain amount; and

•   the remaining heirs formed another community of heirs in respect of the described assets of the succession.

Shortly after, you returned to live in Australia permanently.

A few years later, a Partial Inheritance Division Agreement was made for a large part of the estate between your siblings and yourself (as your deceased parent's spouse had already received a distribution and was no longer an heir within the meaning of that agreement), after you had resigned as executor and withdrawn from the community of heirs. That Partial Inheritance Division Agreement set out a binding agreement regarding the remaining part of the estate of the community of heirs that had not yet been distributed, with the aim of dividing the inheritance as comprehensively as possible to avoid future disputes between the remaining heirs. That Agreement also set out your role as again becoming the executor to administer the remaining assets of the succession, including:

•   managing the main residence of your deceased parent's spouse, and provided that an amount was to be retained to cover the running costs of the property

•   pursuing the civil and criminal litigation against person A, and provided that any sums of money received as a result of the proceedings shall be paid out to the remaining heirs in equal shares of one quarter each within 30 days of receipt

•   retaining a certain amount in the bank account of the estate to finance the litigation against person A, and provided that if or to the extent the sum was not used, the remainder was to be distributed amongst the remaining heirs within 30 days of the final conclusion of all proceedings.

A few years late, a Criminal Court in the overseas country acquitted person A of charges of forgery in titles of securities and unfair management but, as compensation for damages for unlawful acts in respect of commissions and retrocession fees credited by banks to XXX, ordered person A's immediate payment of a certain amount, with a certain interest amount component from around the date you commenced legal proceedings against person A to have them dismissed as your then parents provisional guardian to the executor, (you), of the estate of your late parent, and a small amount as compensation to you personally for legal costs incurred by the procedure.

A few years later, the Court of Criminal Appeal of the overseas country convicted person A of unfair management, imposed a sentence of 1 year's imprisonment, suspended for 2 years, as well as a pecuniary fine, made a compensation order of a certain amount against XXX allocated to the heirs of your deceased parent, represented by the executor of the will, (you), and an order that person A immediately pay an amount to the executor of the will, (you), as compensation for legal expenses of the proceeding.

Some months later, the Criminal Law Court of the overseas country dismissed an appeal by person A against the decision of the Court of Criminal Appeal of the overseas country.

A few months later, the estate's trust account with a certain law firm recorded an amount received from XXX.

About a year later, the Civil Court of the overseas country:

•   ordered person A pay the plaintiffs, the siblings including yourself, jointly and severally, a certain amount, for the loss in value of your late parent's financial portfolio, caused by the failure to sell or realise existing low risk assets in a timely manner, the sale or realisation of existing low risk financial assets and their reinvestment of funds in high risk assets, contrary to the overseas country's regulations for the administration of guardianships, and amounts unlawfully deducted or withdrawn from their accounts, particulars of which were

-   an amount for loss in the value of the financial portfolio of your late parent

-   other amounts for claimed director's fees and management fees at a company that your deceased parent held shares in that were unlawfully deducted or withdrawn by person A from private accounts of your late parent

•   ordered that person A and XXX must, jointly and severally, pay the plaintiffs, jointly and severally, the sum of a certain amount, for putting himself in a position of conflict of interest as provisional guardian and as the director of XXX, so that commissions and retrocession fees were unlawfully paid to and retained by XXX, and an amount unlawfully deducted from the accounts of your late parent, particulars of which were

-    an amount for collection and non-return of commissions and retrocession fees

-    an amount for the balance amount deducted from accounts of your late parent

•   ordered payment of interest at a certain rate per annum from the date you commenced the civil legal proceedings claiming damages for losses to your late parent's financial portfolio on those two amounts

•   ordered person A and XXX, jointly and severally, pay the plaintiffs the sum of a certain amount by way of costs.

However, the Civil Court of the overseas country ruled that person A was not responsible for the losses suffered after the date that person B was appointed provisional guardian, because person A had ceased to act as your late parent's provisional guardian on that date. Subsequent losses could not be attributed to person A because they were no longer in control of your late parent's financial portfolio past the date that person B was appointed provisional guardian. On that basis, the Civil Court found that person A was responsible only for a certain amount of the loss in value of the financial portfolio of your late parent.

A few years later, the Civil Court of Appeal of the overseas country affirmed the decision of the Civil Court and rejected an appeal by person A and XXX against the decision of the Civil Court.

A few months later, person A and XXX appealed against the decision of the Civil Court of Appeal of the overseas country.

About a year later, the overseas Federal Court affirmed the decision of the Civil Court of Appeal of the overseas country and rejected the appeal by person A and XXX.

About a month later, the estate's trust account with the legal firm recorded an amount received from person A and XXX, which was almost the total amount of its joint and several liability for the judgment debt of a certain amount, including an interest amount on that amount, and the order to pay the executor's costs of a certain amount.

A few months later, person A on their own petition was pronounced bankrupt by a Court of the overseas country. XXX remains in existence and has continued to carry on business in the overseas country.

A couple of months later, your deceased parents, spouse died, and person C became the executor of their estate.

About half a year later, a Collocation Statement was filed with the Bankruptcy Office of the overseas country in person A's bankruptcy proceedings. The Collocation Statement admitted the claim by your deceased parent's spouse (or their estate), your siblings, including yourself, as an unsecured creditor of the third class, for the judgment debt of a certain amount with interest calculated from the date of commencement of the civil proceedings to the date of pronouncement of bankruptcy of a certain amount, and court costs as per judgment of a certain date of an amount, for a total claim of a large amount, in the bankrupt estate of person A.

The Collocation Statement estimated the dividends from the bankrupt estate of person A for unsecured creditors as less than one percent. The 'Financial Statement' for the Estate of your late parent incorrectly estimated the expected dividend of less than one percent from person A's bankrupt estate as a small amount.

You claimed that the Collocation Statement demonstrated that person A was insolvent and that consequently, the Succession did not have any prospect of being paid their claim against person A in whole or in part. As a result, the Succession sought to enforce their right to payment against the State of the overseas country that appointed person A.

At the material times, under the overseas country law, the liability of the guardianship bodies was governed by legislation, which established the primary liability of the guardianship bodies of the overseas country and the subsidiary liability of the public authorities. In the absence of fault by members of the public authorities, under the overseas country's legislation, the State of the overseas country was liable for damage caused by the guardian that was not repaired by the guardian.

A few months later, you, by your lawyer, as executor of the succession of your late parent on behalf of your siblings including yourself, after having engaged in negotiations at arm's length with the State of the overseas country, signed and entered into:

•                    'Cession of Claim' of a certain date in the 20XX income year, between the community of residual heirs referred to above and the State of the overseas country, signed by its judicial officers, and also countersigned, a few days later, by the executor of the estate for the spouse of your late parent; and

•                    'Conditions of Contract of Cession of Claim' of a certain date in the 20XX income year between the community of residual heirs referred to above and the State of the overseas country, signed by its judicial officers, and also countersigned, a few days later, by the executor for estate of the spouse of your late parent.

The legal effect of the Cession of Claim and Conditions of Contract of Cession of Claim was the State of the overseas country agreed to payment of a net amount of a certain amount to you as executor of the Estate of your late parent on behalf of your siblings, including yourself for a release or discharge of the liability of the State of the overseas country for their unsatisfied claims against person A under the judgments delivered against the provisional guardianship of person A and the assignment/subrogation of their claim for a certain amount in the bankrupt estate of person A to the State of the overseas country, which the recitals recognised had no value.

About a week later, the amount settled with the State of the overseas country was received in the trust account of the Succession's legal representative. After settling all remaining fees, the balance of a certain amount was transferred to the Estate.

The Estate's Financial Statements for the year ended 31 December 20XX show transfers of a certain amount to each of the residual heirs.

Bank records, provided shortly after show that you received a distribution of capital of a certain amount and a second distribution of a certain amount was made to you a few weeks later.

The Estate resolved to retain the remaining amount for some time to allow for final payouts calculations and negotiations within the terms of the "Will of the Testator, Child C " which were ongoing during and at the end of the income year ended 30 June 20XX.

General guidance on compensation payments

Below is some general information on the taxation of compensation payments.

How this information protects you

If you follow this information and it turns out to be incorrect, or it is misleading and you make a mistake, we will take this into account when deciding what action, if any, we should take. Although you may still have to pay the correct amount of tax, you are protected from penalties and interest provided you have acted reasonably and in good faith.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for you and the Trustee of the Estate of your late parent.

This is to explain how we reached our decision. This is not part of the private ruling.

Question 1

Is the entire amount paid by the State of the overseas country to the Estate of your late parent (the Estate) in the 20XXincome year assessable income of the Estate for the purposes of calculating the net income of the Estate pursuant to section 95 of the ITAA 1936 for the 20XX income year?

Answer

No. Only that part which is attributable to interest is assessable income of the Estate for the purposes of calculating the section 95 net income of the Estate for the 20XX income year.

Question 2

Is any part of the amount paid by the State of the overseas country to the Estate in the 20XX income year assessable income of the Estate for the purposes of calculating the section 95 net income of the Estate for the 20XX income year?

Answer

Yes. That part of the settlement amount that represents interest forms part of the net income of the Estate in the 20XX income year.

Question 3

Is any of the amounts distributed to you as a beneficiary of the Estate in the 20XX income year your assessable income pursuant to section 97 of the ITAA 1936?

Answer

Yes. Your assessable income will include your share of the section 95 net income of the Estate.

Detailed reasoning

Trust income

If you are a beneficiary of a trust, and receive a distribution from the trust, you need to include an amount of that distribution in your assessable income under section 97 of the ITAA 1936.

Section 97 of the ITAA 1936 provides that the assessable income of a beneficiary of a trust who is presently entitled to a share of the income of the trust estate includes, relevantly, 'so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident'.

'Income of the trust estate' is not defined in the tax legislation. It is ascertained by the trustee according to appropriate accounting principles and the trust instrument.

'Net income' is defined in section 95 of the ITAA 1936 as 'the total assessable income of the trustee estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions'.

A beneficiary will be presently entitled to a share of the income of a trust estate if at least by the end of the income year, the beneficiary:

•   has an interest in the income that is vested in interest and in possession, and

•   has a present legal right to demand and receive payment of the income.

Under section 97, a beneficiary includes the same share of the net income of the trust estate as the share of trust income to which they were presently entitled.

Where the net income of the trust estate includes an amount from a capital gain, it will be assessable in accordance with Subdivision 115-C of the ITAA 1997, rather under section 97 or another provision of Division 6 of the ITAA 1936. Subdivision 115-C ensures that the CGT provisions apply to an amount of trust income that is sourced from a capital gain.

Compensation receipts

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts provides guidance about the treatment of compensation receipts. Relevantly, it broadly provides:

•   A right to compensation is an asset for the purposes of the CGT provisions; it arises at the time of the compensable wrong and is disposed of when it is satisfied, surrendered, released or discharged.

•   If an amount of compensation is received in respect of the disposal of an underlying asset, or for the reduction in value of an underlying asset, then the compensation relates to the underlying assets (as capital proceeds or cost base, respectively), rather than to any other asset, such as the right to seek compensation.

TR 95/35 also provides that interest awarded as part of an amount of compensation is assessable income of the taxpayer under the general income provisions. If the taxpayer receives an undissected lump sum compensation amount and the interest cannot be separately identified and segregated out of that receipt, no part of that receipt can be said to represent interest.

CGT event for right to seek compensation

CGT event C2 is set out in section 104-25 of the ITAA 1997. It happens when ownership of an intangible CGT asset ends by the asset, among other things, being redeemed, cancelled, released, discharged or satisfied.

CGT event C2 can happen to intangible assets including a right to seek compensation.

The capital proceeds from CGT event C2 happening to a right to compensation is the amount of compensation awarded by the court. However, section 116-45 of the ITAA 1997 provides that the capital proceeds from a CGT event are reduced by an unpaid amount if:

•   you are not likely to receive some or all of the proceeds

•   this is not because of anything you have done or not done, and

•   you took all reasonable steps to get the unpaid amount paid.

The cost base of a CGT asset, including a right to seek compensation, includes the 5 elements set out in section 110-25 of the ITAA 1997, that is:

•   what you paid (or the market value of property you gave) to acquire it

•   incidental costs you incurred

•   costs of owning the asset that you incurred

•   capital expenditure you incurred to increase or preserve the asset's value or to install or move the asset

•   capital expenditure you incurred to establish, preserve or defend your title to or right over the asset.

However, where the right to seek compensation is owned by an entity that is not a resident and subsequently becomes an Australian resident for tax purposes, the cost base of the asset is affected by section 855-50 of the ITAA 1997. Section 855-50 provides:

•   The first element of the cost base is its market value when the trust (deceased estate) became a resident.

•   The CGT provision of Parts 3-1 and 3-3 of the ITAA apply as if the estate had acquired the right at the time the estate became a resident for tax purposes.

In your circumstances:

•   the first element of the cost base of the right to seek compensation would be nil, as a personal right to seek compensation does not have a market value.

•   when considering other elements of the cost base under Division 110 of the ITAA 1997 (such as legal expenses), only amounts incurred after the Estate became a resident can be included.

CGT event for underlying assets

At paragraph 4, TR 95/35 states:

If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation.

Generally, the relevant CGT event will be CGT event A1, and the timing of the event will be when the asset was originally disposed of, not when the compensation is awarded.

Interest

Interest awarded as part of a compensation amount is assessable income of the taxpayer under section 6-5 of the ITAA 1997.

In general, interest does not become assessable until it has been received or the debt for interest has been in some way discharged. (TR 98/1, paragraph 47)

Dissection of compensation receipts

In respect of compensation receipts that relate to more than one asset, TR 95/35 provides at paragraphs 83 and 85:

If the compensation receipt relates to more than one relevant asset, the compensation needs to be apportioned between those assets. Similarly, if the amount is received for a number of heads of claim (e.g., lost profits, interest and punitive damages), the amount also needs to be apportioned between the items.

... If the taxpayer allocates amounts between different assets on a reasonable basis, we will generally accept that basis of allocation.

Conversion of foreign currency amounts

Under section 960-50, where amounts in foreign currency are taken into account for CGT purposes, those amounts are to be translated at the exchange rate at the time of the transaction or CGT event.

Under section 960-50, if you derive an amount of ordinary income in foreign currency, the amount is to be translated at the exchange rate applicable at the time of receipt, or at the timing derivation if this was earlier than receipt.

Application to taxpayer

To determine the taxation consequences of receipt of the amount, it must first be determined what the nature of the amount paid by the State of the overseas country to the Estate of your late parent in the 20XX income year was. Understanding this will inform how that amount is treated in the hands of the beneficiary for tax purposes.

The primary basis for the payment was in satisfaction of a settlement between the Estate and the State of the overseas country made in the 20XX income year.

Under that agreement, a debt of a certain amount owed by the then bankrupt person A to the Estate was assigned to the State of the overseas country. The debt comprised compensation for a loss caused by person A of a certain amount, interest totalling an amount, and court costs of an amount.

The history of the compensation affirmed by the overseas Court was, in brief:

•   Before your parent's death, person A was appointed as a financial guardian for your late parent. In that role, their actions caused your late parent's financial assets portfolio to lose value. Of a total loss in value of a large amount, person A was responsible for a large loss in value which occurred before they were removed from the role of guardian sometime in 20XX.

•   Whilst a criminal complaint started during your deceased parent's lifetime, it was after their death that that Estate commenced civil action against person A sometime in the 20XX income year. At that time, the Estate was not a resident of Australia for tax purposes.

•   The Estate became a resident of Australia for tax purposes sometime in 2011 when you, as an Australian resident, resumed your role as executor.

•   The civil action went through various courts and appeals, but in 20XX, a final review by the Federal Supreme Court of the overseas country awarded the Estate a certain amount.

•   After making some payments to the Estate, person A became a bankrupt on their own petition and the Executor sought payment of the outstanding sum as against the State of the overseas country who appointed person A.

•   The Executor and the State of the overseas country entered into an agreement to settle all outstanding matters for payment of an amount which was less that the amount awarded against person A.

TR 95/35 provides guidance about the treatment of compensation receipts. Relevantly, it broadly provides:

•   If an amount of compensation is received in respect of the disposal of an underlying asset, or for reduction in value of an underlying asset, then the compensation relates to the underlying asset (as capital proceeds or cost base, respectively), rather than to any other asset, such as the right to seek compensation.

•   If there is no underlying asset, then the relevant asset is the right to receive compensation.

•   Generally, a debt created by the awarding of compensation is not treated as a separate asset. This is consistent with the provisions in section 116-20 and section 116-45 of the ITAA 1997.

TR 95/35 also provides that interest awarded as part of a compensation amount is assessable income of the taxpayer under the general income provisions.

In your case, the Estate has received payment from the State of the overseas country, by way of settlement, for losses caused by person A arising from their breach of duties as financial guardian of your late parent. Broadly, the losses were caused by the maladministration by person A of your parent's financial assets including the sale of existing low risk financial assets, reinvestment of funds in high-risk assets, and the failure to dispose of existing shares in a timely manner.

A large proportion of the settlement agreed with the State of the overseas country may be said to have been received in respect of those underlying assets. A small component specifically relates to commissions and retrocession fees paid to person A's associated company XXX. In relation to this aspect, the relevant asset is the right to seek compensation.

In your case, it is possible to dissect the single sum received as between capital and interest. The judgment in 20XX by the overseas Federal Supreme Court confirmed the prior ruling made some years earlier by the State of the overseas country, awarding a total amount, comprising:

•   an amount representing a loss in value for which person A was responsible

•   an amount representing commission and retrocession fees paid to person A or their associated company, XXX.

•   statutory interest.

The subsequent settlement with the State of the overseas country under which the Estate received an amount did not distinguish between the capital and interest elements of the amount. However, the amount is in apparent substitution for the judgment debt which was assigned to the State of the overseas country and which represented both capital and interest components. In the absence of specific apportionment between these components in the settlement documents, it is considered reasonable to apportion on a proportionate basis in line with the 20XX award.

The amount could therefore be assigned as follows:

•   an amount for financial portfolio losses

•   an amount for damages for unlawful deductions/withdrawals from your late parent's bank accounts

•   an amount (the amount of unpaid court costs claimed and allowed in the Collocation Statement)

•   an amount for interest.

In respect of a certain amount, we accept that this relates to the disposal of underlying assets, including both those disposed by person A and those acquired by person A and later disposed of by the subsequent financial guardian or by the Estate. Generally, where an amount of compensation is received in respect of the disposal of an underlying asset, the compensation represents consideration received on the disposal of that asset. Further, where compensation relates to a number of underlying assets, the recipient would need to allocate the compensation on a reasonable basis between the underlying assets.

In your case, compensation received by the Estate relates to underlying assets which were disposed of either during the deceased's lifetime or before the Estate became an Australian resident. As such, none of this component of the compensation forms part of the net income of the Estate in either the 20XX or 20XX income years (the years in which the compensation was awarded and received, respectively).

Additionally, we will not seek to apply section 99B of the ITAA 1936 to any amounts distributed to you that relate to this portion of the distribution.

In respect of the amount received for damages for unlawful deductions/withdrawals and the amount for the unpaid court costs, there is no underlying assets. As such, the compensation is received in respect of the disposal by the Estate of a right to seek compensation. The relevant CGT event is CGT event C2 (section 104-25 of the ITAA 1997).

The CGT event C2 occurs at the time the asset ends. When the overseas Supreme Federal Court made its final judgment in 20XX, the right to see compensation was discharged. This is the time of the relevant C2 event.

The cost base of the asset is affected by section 855-50 of the ITAA 1997. This provides:

•   The first element of the cost base is its market value when the trust (deceased estate) became a resident. In your case this element would be nil, as a personal right to seek compensation does not have a market value.

•   The CGT provision of Parts 3-1 and 3-3 of the ITAA apply as if the estate had acquired the right at the time the estate became a resident for tax purposes. This means that when considering other elements of the cost base under Division 110 of the ITAA 1997 (such as legal expenses), only amounts incurred after the estate became a resident will apply.

The proceeds in respect of CGT event C2 for the right to seek compensation are the amount awarded by the court. However, as provided in section 116-45 of the ITAA 1997, this amount is reduced to a lesser amount as:

•   the Estate will not receive the entire amount awarded

•   the non-receipt is not related to anything the Estate did (rather, it is due to the bankruptcy of person A and their associates)

•   the Estate took all reasonable steps to get the unpaid amount (by seeking for the State of the overseas country to pay the amount).

As such, the capital proceeds in respect of the C2 event are a certain amount (converted to Australian currency at the time of the CGT event).

Interest awarded as part of a compensation amount is assessable income of a taxpayer under section 6-5 of the ITAA 1997. It is well established that in general, interest does not become assessable until it has been received or the debt for interest has been in some way discharged. In your case, the Estate did not receive any of the interest component of the award until sometime in the 20XX income year when the State of the overseas country paid an amount under a settlement agreement. As such, interest of a certain amount was derived by the estate in the 20XX income year. This income forms part of the net income of the trust estate in the 20XX income year.

You will be assessable under section 97 of the ITAA 1936 to your share of the net income of the trust estate. As outlined above, the calculation of the net income of the trust includes interest amounts forming part of the compensation receipt.

Conclusion

You are a beneficiary of the Estate of your late parent, which became an Australian resident trust during the ruling period.

The net income of the trust estate for the 20XX income year included interest from the compensation awarded to the Estate in the 20XX income year. However, the net income of the Estate for the 20XX income year did not include any amounts related to other aspects of the compensation, as these were capital proceeds relating to CGT events in earlier years.

You received distributions from the Estate in the 20XX income year. As such, your assessable income under section 97, includes the same share of the net income of the trust estate for that income year.

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