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Edited version of your private ruling
Authorisation Number: 1012468316830
Ruling
Subject: Capital Gains Tax
Questions and answers
Is any part of the compensation payment you received a capital gain?
No.
Is the interest component of the compensation payment included in your assessable income in the year you received the payment?
Yes.
This ruling applies for the following periods:
Year ending 30 June 2012
Year ending 30 June 2013
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
You purchased a parcel of shares a number of years ago but after 19 September 19XX.
The value of the shares declined to less than half the price you had paid for them following a trading halt.
You sold your shares at a loss.
A class action was initiated against the company with the claim that they had misled the shareholders.
The court action has been settled with the company paying part of the losses incurred in settlement payments. A component of these payments included interest.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 20-20
Income Tax Assessment Act 1997 Section 20-25
Income Tax Assessment Act 1997 Section 20-30
Income Tax Assessment Act 1997 Section 102-10
Income Tax Assessment Act 1997 Section 102-15
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 121-25.
Reasons for decision
Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) includes in your assessable income amounts that are called statutory income. Under section 102-5 of the ITAA 1997 net capital gains form part of statutory income and are to be included in your assessable income for the income year.
Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts deals with the capital gains treatment of compensation receipts. The ruling advocates a look-through approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph four of this ruling states that where the amount of compensation is received by an individual wholly in respect of the disposal of an underlying asset, or part of an underlying asset of the taxpayer, the compensation represents additional consideration received for the disposal of that asset.
The most relevant asset in respect of the compensation that has been received by you is your shares. Part of the compensation received will be treated as additional capital proceeds received in respect of the disposal of your shares.
A CGT event A1 happens if you dispose of a CGT asset. When you sold your shares you triggered a CGT event A1.
The compensation payment you received is viewed as additional proceeds for the CGT event A1. As a result of receiving the additional proceeds the capital loss you made when you sold the shares is reduced and no capital gain is required to be included in the year you received the additional proceeds.
Interest
Section 6-5 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Interest included in compensation received in respect of non-personal injury, is considered to be ordinary income, and assessable as such. Paragraph 26 of TR 95/35 deals with the interest income components of the payment. The interest component should be included as assessable income of the income year it is received.