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Edited version of your private ruling
Authorisation Number: 1012494442814
Ruling
Subject: Damages payment
Question
Should any part of the compensation payment you received be returned as a capital gain in the 2012-13 financial year?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2013
The scheme commences on
1 July 2007
Relevant facts and circumstances
You and your spouse held a parcel of shares which you sold.
You and your spouse recorded a capital loss in your tax returns in regards to the sale of these shares. You and your spouse had capital losses carried forward to later years in your 2007-08 income tax returns.
A class action was initiated against the company.
The court approved a settlement in regards to the class action.
You and your spouse received damages in regards to the class action.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 102-5
Reasons for decision
Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) includes in your assessable income amount that are called statutory income. Under section 1021-5 of the ITAA 1997 net capital gains is called statutory income and is to be included in your assessable income for the financial year.
Taxation Ruling TR 95/35 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.
In your case the compensation you were paid was as a result of a class action against a company in which you and your spouse had held shares. As the shares were disposed of before you received the settlement amount, the capital component of the compensation you received will be treated as additional capital proceeds received in respect of the disposal of these securities.
The additional proceeds will result in reduced capital losses.