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Edited version of private ruling
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Ruling
Subject: Exemption of compensation payments from CGT
Questions and Answers:
Are the ex gratia payments and the settlement payment exempt from capital gains tax?
Yes.
This ruling applies for the following periods:
Year ended 30 June 2008
Year ended 30 June 2009
Year ended 30 June 2010
The scheme commenced on:
1 July 2007
Relevant facts
You and your spouse have sold the home in which you live.
Settlement has not yet taken place.
You received two ex gratia payments allowing extensions on the contract of sale.
You also received a settlement payment when the contract was transferred from the original buyer to a new buyer.
You lived in the home throughout your period of ownership.
Your home was not used to produce assessable income.
The land surrounding your home is less than 2 hectares.
You have not claimed the main residence exemption on any other property during this period.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 116-20
Income Tax Assessment Act 1997 Section 118-110
Reasons for decision
You make a capital gain or capital loss if a capital gains tax (CGT) event happens. The most common CGT event is the disposal of an asset. Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the timing of the event is the time that the disposal contract was entered in to.
Subsection 116-20(1) of the ITAA 1997 states that the capital proceeds from a CGT event are the total of the money received, or entitled to be received, in respect of the event happening and the market value of any other property received, or entitled to be received, in respect of the event happening.
The main residence exemption provisions in Subdivision 118-B of the ITAA 1997 disregard any capital gain or capital loss that a taxpayer makes on the disposal of a dwelling where certain conditions are met.
Section 118-110 of the ITAA 1997 provides that a capital gain or capital loss will be disregarded if the dwelling was owned by an individual and the dwelling was the individual's main residence throughout the ownership period.
In your case, you entered in to a contract to sell your property and settlement is yet to take place. For CGT purposes you are taken to have disposed of your asset at the time you entered into the original contract of sale. You received ex gratia payments. You also received a settlement payment when the contract was transferred from the original buyer to a new buyer.
The capital proceeds from selling your property include the ex gratia and compensation payments made to you because they were payments received in respect of the disposal of the property pursuant to subsection 116-20(1) of the ITAA 1997
You are eligible to apply the main residence exemption because you lived in the home throughout your ownership period and did not use it to produce assessable income. You did not claim the main residence exemption on any other residence during this period. Therefore the capital gain or loss that you make on the sale of the property will be disregarded pursuant to section 118-110 of the ITAA 1997.