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Ruling
Subject: Interest on capital proceeds
Question 1
Does the interest component form part of the capital proceeds?
Answer
No
Question 2
Is the interest component assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You purchased a property.
A government authority notified you of their intention to compulsorily acquire a portion of this property.
The government authority subsequently acquired a portion of your property.
You did not receive compensation for the acquisition of your property until the 2011-12 income year.
You were paid $X in full settlement of the land acquisition. In their advice to you, the government authority advised that the compensation payment was comprised of the following amounts:
· $X - principal sum, and
· $X - interest
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Subsection 116-20(1)
Reasons for decision
The capital proceeds from a capital gains tax (CGT) event are the total of the money you have received, or are entitled to receive, in respect of the CGT event happening.
Taxation ruling 95/35 provides guidance on the CGT implications of compensation payments. Paragraph 26 advises that interest awarded as part of a compensation amount is assessable income of the taxpayer under general income provisions. If the taxpayer receives an undissected lump sum amount and the interest can not be separately identified and segregated out of that receipt, no part of that receipt can be said to represent interest.
In your case, you received compensation from the government authority in relation to the compulsory acquisition of your property. The amount of $X is clearly identified as interest. Accordingly, this amount will be assessable as ordinary income under section 6-5 of the ITAA 1997 and will not form part of the capital proceeds for the disposal of the property.