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Edited version of your written advice
Authorisation Number: 1013024366064
Date of advice: 30 May 2016
Ruling
Subject: Capital gains tax
Question 1
Do the property transfers trigger CGT event A1 for both parties?
Answer
Yes.
Question 2
Do the property transfers trigger CGT event C2?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 20YY
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
Party A conducted a business on adjacent farming land to Party B who also carried on a similar business.
Following a dispute, Party A, issued legal proceedings against Party B claiming entitlement to a portion of the assets used in their business.
Prior to the commencement of legal proceedings, a number of attempts were made to resolve the issue via mediation. As a result of mediation an agreement was reached.
As part of the agreement Party A received a number of assets from Party B. In exchange, Party A also transferred a number of properties to Party B. In addition, Party A agreed to withdraw the legal proceedings.
Under the terms of settlement it was agreed that the proceedings could not be reinstated by either party.
The terms of settlement did not apportion any of the proceeds that Party A received between those they received for the disposal of their own property, and those they received from disposing of their right to seek compensation.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 102-20
Income Tax Assessment Act 1997 - Section 108-5
Income Tax Assessment Act 1997 - Subsection 102-25(1)
Income Tax Assessment Act 1997 - Section 104-10
Reasons for decision
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. Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.
CGT event A1 occurs if you dispose of a CGT asset (section 104-10 of the ITAA 1997). The disposal of property triggers CGT event A1.
Section 104-25 of the ITAA 1997 indicates that CGT event C2 happens if a taxpayer's ownership of an intangible asset ends by the asset being redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered, forfeited or expiring. The right to seek compensation is an asset for CGT purposes.
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 11 of TR 95/35 states that if an amount of compensation is received by the taxpayer wholly in respect of the disposal of an underlying asset of the taxpayer, then the compensation represents consideration received on disposal of that asset (CGT event A1). In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation. If the amount of compensation is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. It is only in these cases that CGT event C2 would occur.
Application to your circumstances
In this case, both parties disposed of property to one another. This triggered CGT A1 events for both parties. However, under the terms of settlement it was also agreed that Party A would discontinue their legal proceedings against Party B. It was agreed that neither party could subsequently reinstate the proceedings. Accordingly, it is also necessary to consider whether CGT event C2 occurred with regards to the disposal of the right to seek compensation.
The terms of settlement did not apportion any of the proceeds that Party A received between those they received for the disposal of their own property, and those they received from disposing of their right to seek compensation.
In situations where more than one CGT event applies, subsection 102-25(1) of the ITAA 1997 provides guidance on the order and precedence of the events. Specifically, this provision states:
Work out if a CGT event (except CGT events D1 and H2) happens to your situation. If more than one event can happen, the one you use is the one that is most specific to your situation.
By taking the above into consideration and also adopting the 'look-through' approach as advocated in TR 95/35, it is considered that the underlying assets in this case are the properties that Party A disposed of, and not their right to seek compensation. Accordingly, CGT event A1 is the most specific event to the situation described and CGT event C2 was not triggered on settlement.