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Edited version of your private ruling
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Ruling
Subject: Assignment of debt
Question 1
Is the interest in the judgement order assessable income to you under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
Question 2
Is the debt assignment assessable income under section 6-5 of the ITAA 1997?
Answer
No.
Question 3
Is the debt assignment a capital gains tax (CGT) event?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You lent a sum of your own funds to an investment entity with confirmation of the interest earning rate. The investment entity did not repay the debt and interest by its due date.
A deed acknowledged that the investment entity owed you the principal sum and interest. None of these amounts have been paid to you.
A consent judgment ordered that the investment entity pay you an amount including the principal and interest on the judgment sum.
Several years ago a third party commenced court proceedings against you. It is contended that control of assets were transferred to you in circumstances which are capable of being set aside under the law. Although this contention is rejected you are willing to consider a commercial resolution of the claim in order to reach finality.
You proposed an offer to pay the third party an additional amount and also assign the debt and interest that is owed to you by the investment entity to the third party in full and final satisfaction of all claims against you. This proposal is subject to you being satisfied that there are no tax implications arising from the assignment of the debt and interest and all current legal proceedings against you be dismissed.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 6-25
Income Tax Assessment Act 1997 section 102-5
Income Tax Assessment Act 1997 section 102-20
Income Tax Assessment Act 1997 section 104-10
Reasons for decision
Section 6-5 of the ITAA 1997 states that your assessable income includes income according to ordinary concepts. Section 6-25 stipulates that ordinary income may be included in your assessable income by one or more provisions about assessable income but the amount is included only once in your assessable income for that year.
The issue relating to a debt owed is captured under the CGT provisions and reported under section 102-5 of the ITAA 1997 and not under section 6-5.
Section 102-20 of the ITAA 1997 states a debt owed to you is a CGT asset. A capital gain or capital loss arises if a CGT event happens to a CGT asset.
The most common CGT event happens if you dispose of an asset to someone else. Under section 104-10 of the ITAA 1997 the disposal of a CGT asset causes a CGT event A1 to happen.
You will make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. Section 102-5 of the ITAA 1997 states that any net capital gain for the income year is required to be included in your assessable income.
In your case, a debt is owed to you by an investment entity since a consent judgment ordered that they pay you an amount including the principal. The judgment order also stipulates that interest accrues until the judgment sum is paid. Therefore the CGT asset will include the judgment amount and the interest amount as calculated daily to the date of the assignment agreement.
As the debt owing to you is a CGT asset, its disposal by assigning it to a third party will result in a CGT event A1.
Accordingly, any capital gain if the capital proceeds from the disposal are more than the asset's cost base made from the assignment of the debt will be included in your assessable income under section 102-5 of the ITAA 1997.