Edited version of your private ruling

Authorisation Number: 1012225216053

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Ruling

Subject: CGT - compensation payment - consideration of paragraph 118-37(1)(b)

Question 1:

Will any capital gain made in relation to the compensation be disregarded under paragraph 118-37(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2012

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 reside on a property.

The company is carrying out operations on nearby land which will adversely impact on you.

You commenced proceedings against the company.

You contended that ongoing disturbances from the operations, being noise, exceeded the levels permitted by the Environmental Authorities and that contrary to the conditions imposed by the Environmental Authorities, the dust resulting from the operations constitutes a nuisance.

You were concerned that the noise generated by the operations would mean that you would be unable to reside in your home.

You were also concerned that the dust arising from the operations would cause you harm and make it difficult for you to reside in your home.

You and the company entered into an agreement.

In consideration of the receipt of the compensation amount you agreed to discontinue and withdraw the proceedings.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Capital gains tax (CGT)

Receipt of a lump sum payment may give rise to a capital gain (statutory income). However, paragraph 118-37(1)(b) of the ITAA 1997 disregards payment or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness.

Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. TR 95/35 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.

Paragraphs 296 to 304 of TR 95/35 provide a number of examples where taxpayers seek compensation for personal wrong injury or illness and even though the relevant CGT asset is the right to seek compensation, using the 'look-through' approach the compensation amount is exempted under subsection 160ZB(1) of the Income Tax Assessment Act 1936. Paragraph 118-37(1)(b) of the ITAA 1997 replaced subsection 160ZB(1) of the Income Tax Assessment Act 1936 from 1 July 2006.

When settling with a lump sum payment you would be surrendering your rights to present and future claims which may have arisen or which may arise as a result of noise, dust, odour or light emissions arising from the operations. As the claim relates to noise, dust, odour or light emissions arising from the operations, any capital gain or loss arising from the surrender of your rights in relation to the operations will be disregarded as a personal wrong.

Applying paragraph 118-37(1)(b) of the ITAA 1997 to your circumstances, the lump sum payment would not be considered as an assessable capital gain.