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Edited version of your private ruling
Authorisation Number: 1012315676423
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Subject: Capital gains tax - deceased estate - cost base - disposal
Question 1:
Is the amount you received as compensation subject to capital gains tax (CGT)?
Answer:
Yes.
Question 2:
Are the legal costs you incurred included in the cost base?
Answer:
Yes.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commenced on:
1 July 2011
Relevant facts:
You received an amount in a foreign currency.
You received this amount as settlement of a dispute involving a deceased estate.
The dispute involved a property located outside of Australia.
You have contributed the same amount to fund the litigation.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 104-25
Reasons for decision:
Income
For a compensation payment to be assessable as income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), the payment must be income according to ordinary concepts.
Compensation payments are considered to be income according to ordinary concepts where the payment is compensation for the loss of income or where some portion of the lump sum payment is identifiable and quantifiable as income.
As the payment you received is not for loss of income nor is any part of it identifiable as income, the amount is a capital payment and is not assessable.
Capital Gain
A CGT asset is any kind of property or a legal or equitable right that is not property. The right to seek compensation is considered to be a CGT asset.
You make a capital gain or capital loss only if a CGT event happens to a CGT asset you own.
When you settled the legal action, CGT event C2 occurred.
You made a capital gain if the capital proceeds that you receive are greater than the asset's cost base. You made a capital loss if the capital proceeds are less than the asset's reduced cost base.
Capital proceeds
For most CGT events the capital proceeds is the money you receive (or are entitled to receive) from the event. In your case the capital proceeds are the total of the compensation you received.
Cost base
The cost base of a CGT asset consists of five elements. In your situation the fifth element is relevant to your particular circumstances as the element refers to the amount you paid to defend or preserve title to the property. Therefore, your total cost base of the right to seek compensation is the amount you paid to pursue your claim (your legal costs).
In your situation, as the amount that you received in compensation is equal to the amount of legal costs that you have incurred, you do not have a CGT liability.