| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your private ruling
Authorisation Number: 1012518077664
Ruling
Subject: Capital gains tax - shares - disposal - compensation
Question:
Should any part of the compensation payment you received be returned as a capital gain in the relevant financial year?
Answer:
No
Question:
Is the interest amount assessable?
Answer:
Yes.
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commenced on:
The scheme has commenced
Relevant facts:
You held shares in company A and sold them at a loss after a period of time.
A group of lawyers commenced a class action in the Federal Court against the ASX listed entities. The action brought against the companies was in relation to a specific period.
It is alleged that the entities engaged in misleading and deceptive conduct and breached their obligations of continuous disclosure under the ASX listing rules and the Corporations Act and that both companies engaged in misleading and deceptive conduct by failing to adequately disclose to their security holders and to the ASX.
The claim alleges that the companies failed to adequately disclose the financial risk to which the entities were exposed and that this led to the price of the shares and securities trading on the ASX at an inflated price.
You joined the class action.
The court approved a settlement in regards to the class action and the administration and distribution of the settlement was completed in the relevant income year.
You received a damages payment in regards to the losses you incurred relating to the securities.
You have provided a copy of a letter from the lawyers.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 102-5
Taxation Administration Act 1953 Sch 1 Section 18-15
Reasons for decision:
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 relation to the class action, the relevant assets are the securities that were held by investors.
The additional proceeds will result in reduced capital losses.
As a result the compensation amount you received in the relevant financial year is not recorded as a capital gain in your relevant tax return.
Paragraph 26 of TR 95/35 deals with the interest component of compensation receipts, the ruling states that any amount of interest included in an amount of compensation received is considered ordinary income. This income needs to be included in an individual's return in the year that it is received. If amounts have been withheld, an individual will be entitled to a tax credit for the amount that has been withheld.