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Ruling

Subject: Capital gains tax consequences of an ex gratia payment

Question

Will the ex-gratia payment received from the bank form part of the capital proceeds for the disposal of the property?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

You signed a contract to purchase a residential unit in a complex.

You sought the bank's assistance to obtain a bank guarantee representing the deposit in the contract.

Your intensions at the time were to on-sell the unit off the plan. Unfortunately market conditions changed and you were no longer able to do that.

You sought advice from the bank and their representative at the lending centre obtained a loan approval for you to complete the purchase of the unit.

That loan was approved without any further documentation being provided by you to the bank in relation to the loan.

You were able to settle the purchase.

In addition to the loan for the purchase of the unit, you had a home loan outstanding and also had a loan for another property. You have subsequently been forced to sell the other property. You have been in negotiations with the bank indicating to them that you believe the bank is responsible for your current financial position given the way the loan was organised by the bank's representatives.

As a result of your representations, the bank has offered to resolve your concerns as follows:

a) extinguishing the loan for the unit in exchange for you giving the bank possession of the property pursuant to the mortgage

b) cover all legal and associated costs with that transaction; and

c) upon completion and execution of suitable documentation the bank will:

provide you with a one (1) off ex-gratia cash payment of $X.

Suspend payments on the unit loan until the transaction is finalised and those arrangements are in place

· suspend payments on the unit loan until the transaction is finalised and when those arrangements are in place w

· write a new loan of $X to replace the existing loan on similar terms and conditions already existing.

You received the ex gratia payment in the year ended 30 June 20XX.

Transfer of the title to the property to the bank took place in late 20yy.

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 100-25

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 106-60

Reasons for decision

Summary

The ex-gratia payment received by you is not part of the proceeds for the disposal of your property.

Detailed reasoning

Capital gains tax (CGT) is income tax paid on any net capital gain made as the result of a CGT event taking place. CGT events are the different types of transactions that may result in a capital gain or capital loss. Most CGT events involve CGT assets.

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, personable injury or other compensable damage or injury. A right to seek compensation is an asset for the purposes of the CGT provisions. The right to seek compensation is acquired at the time of the compensable wrong or injury, and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged.

Section 106-60 of the Income Tax Assessment Act 1997(ITAA 1997) provides that an act done by an entity in relation to a CGT asset for the purpose of enforcing or giving effect to a security, charge or encumbrance the entity holds over the asset as if the act had been done instead by the person who provided the security. As a result of this, the timing of any CGT event that relates to such an asset will be when the entity holding the charge over the asset disposes of the asset.

Application to your case

In your case, you have received an ex gratia payment from the bank. This payment was one of a number of actions undertaken by the bank in response to your representations to the bank regarding the purchase and disposal of a residential unit. Other actions taken by the bank in relation to this matter include:

· extinguishing the loan for the unit in exchange for you giving the bank possession of the property pursuant to the mortgage

· cover all legal and associated costs involved with that transaction; and

· suspend payments on the unit loan until the transaction is finalised and when those arrangements are in place

· write a new loan to replace the existing loan on similar terms and conditions already existing.

By agreeing to these actions you release and discharge the bank parties from all claims and the parties agree the agreement is entered into in full and final settlement of all claims.

In your circumstances, when you entered into negotiations with the bank, you acquired an intangible asset which was your right to seek compensation. The agreement to settle was made whereby you received an ex-gratia payment among other items for abandoning your right to seek further claim and accepting that the payment and other actions undertaken by the bank constituted full and final settlement of all matters outstanding and arising out of the complaint.

CGT event C2 occurs if your ownership of an intangible asset (that is your right to seek compensation from the bank in relation to this matter) ends by it being redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited or by the asset expiring.

By accepting the payment you released and discharged the ownership of your intangible CGT asset and as a result your ownership in the asset ended and CGT event C2 was triggered. The time of the event occurring was when the contract was entered into.

As a result, CGT event C2 occurred when you entered into the contract to receive the lump sum from the bank and accepted that receiving the sum along with the other actions taken by the bank would be full and final settlement of all matters outstanding and arising out of the complaint. Any capital gain resulting from the payment will be an assessable gain under the CGT provisions and will be included in your assessable income for the year ended 30 June 20XX.

Whilst compensation payments can be attributed to an underlying asset, on this occasion due to the operation of Section 106-60 of the ITAA 1997, the disposal of the CGT asset (and CGT event A1) did not take place until late 2011 whilst the payment was received in the year ended 30 June 2011 as a result of CGT event C2 occurring.