Edited version of your written advice

Authorisation Number: 1051185979252

Date of advice: 1 February 2017

Ruling

Subject: Compensation

Question 1

If you accept the offer of compensation in full and final settlement of all claims you have against your advisor and enter into a Deed of Settlement and Release will CGT event C2 happen at that time?

Answer

Yes.

Question 2

Will you be entitled to apply the general 50% discount to your capital gain?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 20YY

Year ending 30 June 20ZZ

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You engaged a financial advisor to provide you with financial advice.

You made a claim against the advisor as there was a dispute in regards to the financial advice you received from them and the management of your investments.

The advisor has made you an offer of compensation to settle the dispute.

You are considering accepting the offer of compensation.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 subsection 102-5(1)

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-25

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

Income Tax Assessment Act 1997 subsection 104-25(2)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 116-20

Reasons for decision

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

CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including being released or cancelled (subsection 104-25(1) of the ITAA 1997). 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).

A CGT asset is any kind of property or a legal or equitable right that is not property (section 108-5 of the ITAA 1997).

In your case, your right to seek compensation is an intangible CGT asset (acquired at the time of the compensable wrong) and your ownership of that asset will end when you enter into the Deed of Settlement and Release. At that time CGT event C2 will happen.

The capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive, in respect of the event happening, and the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event) (section 116-20 of the ITAA 1997).

In your case, the capital proceeds will include the lump sum payment you receive under the Deed of Settlement and Release.

You will make a capital gain if those proceeds are more than the right's cost base.

The cost base of the right to seek compensation is determined in accordance with the provisions of section 110-25 of the ITAA 1997. The cost base of a CGT asset consists of 5 elements (subsection 110-25(1) of the ITAA 1997).

The first element includes in the cost base any consideration in respect of the acquisition of the right to seek compensation (subsection 110-25(2) of the ITAA 1997). As a general rule, a taxpayer does not pay or give any money or property to acquire the right to seek compensation.

The second element is the incidental costs you incur to acquire a CGT asset or that relate to a CGT event (subsection 110-25(3) of the ITAA 1997). Incidental costs include remuneration for the services of accountants, financial advisers and legal advisers (subsection 110-35(2) of the ITAA 1997). However, expenditure does not form part of the second element of the cost base to the extent that you have deducted it or can deduct it (subsection 110-45(1B) of the ITAA 1997).

The other three elements are not relevant to your circumstances.

50% general CGT discount

Section 115-25 of the ITAA 1997 generally allows any individual to apply a 50% discount to any capital gain provided that the CGT event to which the capital gain relates occurs at least 12 months after the asset is acquired.

You acquired the right to seek compensation when the allegedly inappropriate financial advice was provided to you from 20VV until 20WW. You will dispose of this right when you enter into the Deed of Settlement and Release in 20YY.

As your right to seek compensation was acquired more than 12 months before the disposal will occur, you can apply the 50% general discount to any capital gain you will make from CGT event C2 happening.