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Ruling

Subject : Shares class action compensation receipt.

Question

Is your compensation receipt from the class action a part recoupment of the cost base and reduced cost base of your shares?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a shares investor that accordingly accounts for your shares under the CGT provisions.

You received compensation from a class action.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 110-45

Income Tax Assessment Act 1997 Section 111-55

Reasons for decision

In relation to a capital gain, subsection 110-45(3) of the Income Tax Assessment Act 1997 (ITAA 1997) states expenditure does not form part of any element of the cost base to the extent of any amount you have received as recoupment of it (except so far as the amount is included in your assessable income).

In relation to a capital loss, subsection 110-55(6)  of ITAA 1997 states expenditure does not form part of the reduced cost base to the extent of any amounts you have received as recoupment of it.

Taxation Ruling TR 95/35 discusses capital gains and the treatment of compensation receipts. The ruling provides a 'look-through approach' to identify the most relevant asset that has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation.

Paragraph 6 of the ruling states if an amount of compensation is received by a taxpayer wholly in respect of a permanent reduction in the value of a post-CGT underlying asset of the taxpayer, and there is no disposal of that underlying asset at the time of the receipt, we consider that the amount represents a recoupment of all or part of the total acquisition costs of the asset.

Similarly, paragraph 10 of the ruling states if a taxpayer is compensated for having paid excessive consideration to acquire an asset the amount referable to the overpayment represents a recoupment of all or part of the total acquisition costs of the asset.

Accordingly, the total acquisition costs of the post-CGT asset should be reduced by the amount of the compensation. No capital gain or loss arises in respect of that asset until the taxpayer actually disposes of the underlying asset (paragraph 7 of the ruling).

In your case, you received a compensation receipt in respect to your shares, which are the underlying asset. Both paragraphs 6 and 10 of TR 95/35 appear to have relevance to the class action. It follows the amount of your compensation receipt is to be subtracted from the CGT cost base or reduced cost base of your shares.

In other words, no capital gain will arise in respect of your compensation receipt until you actually dispose of your underlying shares. If you dispose of your shares at a sizeable loss, your compensation receipt will merely reduce your capital loss (rather than be a capital gain in itself).