Edited version of your written advice

Authorisation Number: 1013119653863

Date of advice: 7 November 2016

Ruling

Subject: Compensation

Question

Is the lump sum settlement payment assessable under the capital gains provisions?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 201X

The scheme commenced on:

1 July 201X

Relevant facts and circumstances

You received an undissected lump sum payment.

This payment was for full and final settlement, satisfaction and discharge of all claims.

You believe the payment represents wages and superannuation and right to seek compensation and assist other workers with claims and therefore it should be a 50/50 split.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-25.

Income Tax Assessment Act 1997 section 118-37

Reasons for decision

Part 3-1 of the ITAA 1997 contains the capital gains and losses provisions commonly referred to as the CGT provisions. You make a capital gain or capital loss if a CGT event happens in respect of a CGT asset.

A CGT Event C2 under section 104-25(1) of the ITAA 1997 happens if a taxpayer's ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied. The time the CGT event occurs is when (a) a contract is entered into which results in the asset ending, or (b) if there is no contract, when the asset ends.

A C2 event is a form of assessable income under section 102-5 of the ITAA 1997.

Taxation Ruling TR95/35: Income tax: capital gains: treatment of compensation receipts (TR95/35) is a ruling which discusses how compensation receipts are treated in terms of capital gains tax. In compensation-type scenarios, the intangible CGT asset is the right to seek compensation, which 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. The CGT event C2 happens on the ending of the right to seek compensation is satisfied, surrendered, released or discharged.

In terms of when a right to seek compensation is satisfied, surrendered, released or discharged, Paragraph 158 of TR95/35 provides that this is generally at the final point of settlement of the claim, whether in the course of Court proceedings, or in an out of Court arrangement. The time of the disposal is taken to be the time of entering into the settlement agreement and receiving the compensation.

The payment was in full and final settlement.

When you accepted the Payment, you discharged your right to seek compensation. As a result, this triggered a C2 event under section 104-25(1) of the ITAA 1997.

The lump sum payment is assessable under the capital gains provisions.

If the compensation is received in relation to multiple heads of claim, TR 95/35 allows a reasonable apportionment of that payment. For example, if a payment is intended to replace both an income stream and other potential benefit entitlements, the payment may be apportioned between the two heads of claim on a reasonable basis. However, if the payment is truly an un-dissected lump sum - that is, no reasonable apportionment can be made between the multiple heads of claim - no exemption can be applied.

There is no evidence that the settlement payment was paid to you for wages and superannuation benefits, the settlement agreement does not make any reference to the payment being for anything other than full and final settlement of all claims.

Therefore, the payment cannot be reasonably apportioned and the whole amount is assessed under the capital gains provisions.