Edited version of your written advice

Authorisation Number: 1012828583733

Date of advice: 24 June 2015

Ruling

Subject: Capital gains tax

Question 1

Will the capital gain from your compensation payment be disregarded?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Prior to 20 September 1985, you were employed by a state Government as a temporary employee working on a full time basis.

Approximately eight years later you were appointed as a permanent employee.

You were never told that you were entitled to be a permanent employee of the State and therefore receive the same benefits of a permanent employee. This is in the form of Superannuation for some or most of the period of your employment as a temporary employee.

You were employed in accordance with the relevant state Act which stated that you could not be employed as a temporary employee for more than a 12 month period.

You commenced legal proceedings.

You were offered an ex-gratia lump sum payment in settlement of the proceedings.

You signed a Deed of Release,

The payment was made to resolve the proceedings and all actions, suits, claims, complaints, demands, costs and other liabilities of any nature.

In accepting a lump sum payment you agreed to release and discharge the State, its delegates, officers, servants and agents or any of them from all actions, suits, claims, complaints, demands, costs and other liabilities of any nature which you have or at any time may have.

In accepting the lump sum you indemnified the State, its delegates, officers, servants and agent or any of them against any claims arising out of or in way connected with the subject matter of the proceedings.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 102-5(1).

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 104-25.

Reasons for decision

Your assessable income includes your net capital gain for the income year (subsection 102-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)). You make a capital gain (or loss) as a result of a capital gains tax (CGT) event happening (section 102-20 of the ITAA 1997).

CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

• being redeemed or cancelled;

• being released, discharged or satisfied;

• expiring; or

• being abandoned, surrendered or forfeited.

The time of the event is when you enter into the contract that results in the asset ending, or if there is no contract, when the asset ends (subsection 104-25(2) of the ITAA 1997).

In your case, your right to seek compensation was an intangible CGT asset (acquired at the time of the compensable wrong) and your ownership of that asset ended when you signed the Deed of Release. At that time CGT event C2 happened.

Taxation Ruling TR 95/35 deals with the tax treatment of compensation receipts. Paragraph 3 of TR 95/35 states that the right to seek compensation is acquired at the time of the compensable wrong or injury, and includes all of the rights arising during the process of pursuing the compensation claim. Any capital gain or loss resulting from disposal of the right is calculated using the cost base of the right.

According to subsection 104-25(5) of the ITAA 1997, a capital gain or loss from CGT event C2 is ignored if the asset was acquired before 20 September 1985.  

In your case, the time of the compensable wrong arose prior to 20 September 1985. Therefore, any capital gain is disregarded.