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Edited version of your private ruling
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Ruling
Subject: Compensation payment and capital gains.
Question and answer
Is a compensation amount made payable a part of a shareholder class action included in your reduced cost base?
Yes
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts and circumstances
You purchased an amount of shares
A shareholder class action was raised against the share issuing company for allegedly breaching disclosure obligations.
In 2010 the Federal Court ordered participating shareholders to verify their claims against the the share issuing company for allegedly breaching its disclosure obligations
Later in 2010 the Federal Court made formal orders approving a settlement and appointed administrators to settlement scheme.
You as an eligible shareholders received compensation towards the end of 2010.
Your shares were consequently acquired in late 2010.
Your shares incurred a significant capital loss.
Relevant legislative provisions
Income Tax Assessment Act 1997
Section 110-55
Reasons for decision
If you receive an amount of compensation wholly in respect of a permanent reduction in the value of a post-CGT underlying asset (your shares), and there is no disposal of that asset at the time of the receipt, we consider that the amount of compensation represents a recoupment of part of your share acquisition costs (Taxation Ruling TR 95/35).
As you still owned the shares at the time that the compensation was paid, the total acquisition costs of your post-CGT asset should be reduced by the amount of compensation you were paid (section 110-55 of ITAA 1997).
Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens on the disposal of a CGT asset. A share, as in your case, is disposed of if there is a change in its ownership from one entity to another.
The capital proceed from your transaction is the amount that you received, or are entitled to receive on the disposal of your shares (section 116-20 of the ITAA 1997).