Edited version of your private ruling

Authorisation Number: 1012542541011

Ruling

Subject: capital gains tax

Question 1

Is part of the settlement payment you received in the 2011-12 financial year assessable under the capital gains tax (CGT) provisions?

Answer

Yes.

Question 2

Is the interest component of the settlement payment assessable as ordinary income?

Answer

Yes.

Question 3

Will the payment you received in the 2012-13 financial year be assessable as a capital gain?

Answer

No.

Question 4

Is the component of the payment that represents unpaid interest assessable as ordinary income?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on

1 July 2011

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling,

· various documents related to the legal proceedings

· the declaration from the receivers and managers, and

· you had secured and unsecured investments with a company.

The company was placed into administration.

You were a part of a legal proceedings against the company in relation to the unsecured investment.

As a result of this action, you received a settlement amount in the 2011-12 financial year.

A component of this payment was identified as interest.

You have received several payments from the receivers in relation to your secured investment.

In the 2012-13 financial year you received X cents in the dollar in relation to your secured investment.

A component of this payment was interest.

The liquidator made a declaration in the 2012-13 financial year that there were reasonable grounds to believe that the secured investment issued by the company will have no value, or will have only negligible value.

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 102-5

Income Tax Assessment Act 1997 subsection 104-25(1)

Income Tax Assessment Act 1997 paragraph104-25(1)(b)

Income Tax Assessment Act 1997 section 140-145

Income Tax Assessment Act 1997 subsection 140-145(2)

Reasons for decision

Question 1

Capital gains tax (CGT) is the tax you pay on certain gains you make. Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or capital loss as a result of a CGT event happening to an asset in which you have an ownership interest.

Paragraph 108-5(1)(b) of the ITAA 1997 states that a CGT asset includes legal and equitable rights that are not property. Legal and equitable rights are also intangible assets in terms of subsection 104-25(1) of the ITAA 1997. The right to seek compensation is an example of a legal or equitable right and is also an intangible asset.

TR 95/35 specifies a 'look through' approach to identify whether the compensation is in relation to an underlying asset. Where there is no relevant underlying asset, the ruling states that the compensation relates to the disposal by the taxpayer of the right to seek compensation.

Section 104-25 of the ITAA 1997 specifies that CGT event C2 will occur when an intangible asset is cancelled, surrendered or has a similar ending. Specifically, subparagraph 104-25(1)(b) of the ITAA 1997 states that CGT event C2 happens if ownership of an intangible CGT asset ends by being released, discharged or satisfied.

In this case, you were apart of legal proceedings against the company. A settlement was reached and as a result you received a payment. We consider that upon settling your claim, you disposed of your right to seek compensation. CGT event C2 occurred on the date you executed the settlement documentation.

Question 2

Subsection 6-5(1) of the ITAA 1997 states that your assessable income includes income according to ordinary concepts. This 'ordinary income' includes amongst other things, income from salary and wages and interest.

Taxation Ruling TR 95/35 deals with the tax treatment of compensation receipts. Paragraph 26 of this ruling specifically deals with the treatment of interest awarded as a part of a compensation amount:

Interest awarded as part of a compensation amount is assessable income of the taxpayer under the general income provisions. If the taxpayer receives an undissected lump sum compensation amount and the interest cannot be separately identified and segregated out of that receipt, no part of that receipt can be said to represent interest.

In this case, you received compensation and an amount was separately identified as interest. Therefore, the interest component is assessable as ordinary income.

Question 3

CGT event G3 happens if you own shares in a company, or financial instruments issued by or created by or in relation to a company, and a liquidator or administrator of the company declares in writing that the liquidator or administrator has reasonable grounds to believe (at the time of the declaration) that:

(c) for shares - there is no likelihood that shareholders in the company, or shareholders of the relevant class of shares, will receive any further distribution for the shares; or

(d) for financial instruments - the instruments, or a class of instruments that includes instruments of that kind, have no value of have only negligible value.

As per subsection 140-145(2) of the ITAA 1997, the time of the event is when the declaration is made. You can choose to make a capital loss equal to the reduced cost base of your financial instruments as at the time of the declaration.

If you make the choice, the cost base and reduced cost base of the shares or financial instruments are reduced to nil just after the declaration was made. This is for the purpose of working out if you make a capital gain or loss from any later CGT event in relation to the financial instruments.

In this case, you received X cents in the dollar from the receiver and managers. A portion of this payment represented a repayment of the principal investment amount. The amount the represents a return of capital will reduce the capital loss you make on the secured notes.

Question 4

As discussed above, subsection 6-5(1) of the ITAA 1997 states that your assessable income includes income according to ordinary concepts including interest.

Therefore, the component of the payment that represents unpaid interest is assessable as ordinary income.