Edited version of private ruling

Authorisation Number: 1011708359803

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Deed of release

Question 1

For capital gains tax (CGT) purposes, will the settlement payment to be received by you on the exercise of the deed of release relate to the disposal of the properties as specified in the deed?

Advice/Answers

Yes.

Question 2

If the relevant CGT event is CGT event C2, for the purposes of the discount method for calculating a capital gain under Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997), what is the acquisition date of the asset disposed of?

Advice/Answers

As the relevant CGT event in this case is CGT event A1, it is not necessary to answer this question.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You have forwarded a copy of a deed of release.

The deed of release states that you will be paid a settlement amount in relation to activities carried out on your land in the past and in the future. You will agree to release the parties carrying out the activities from all liability and claims in relation to the activities.

The deed of release would not be exercised unless the properties were sold.

The sales of the properties have now been settled.

Some of the properties are pre-CGT properties and some are post-CGT properties.

There is no dissection of the settlement amount.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Division 115

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Generally, compensation and settlement payments which do not have the characteristics of income are capital in nature and are considered under the CGT provisions of the ITAA 1997. The settlement payment in your case is one which would be considered under the CGT provisions.

Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

In this case, the properties to which the purchase contracts relate are the relevant or underlying assets to which the settlement amount relates to. The settlement payment to the landowners relates to activities carried out on the land, and the payment is subject to the settlement of the purchase contracts. The settlement amount therefore relates to the properties and your interests in the properties, being the underlying assets, and their disposal, and is not consideration received for the disposal of any other asset, such as the right to seek compensation.

As the settlement amount will be received in respect of the disposal of an underlying asset, the settlement amount will be consideration for that disposal, and CGT event A1 under section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will be the relevant CGT event in this case.

Note

It is the individual partners who make a capital gain or capital loss from a CGT event, not the partnership itself. For CGT purposes, each partner owns a proportion of each CGT asset. Each partner calculates a capital gain or capital loss on their share of each asset.