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Edited version of private advice
Authorisation Number: 1051613532512
Date of advice: 26 November 2019
Ruling
Subject: Legal expenses for proof of standing
Question 1
Is lump sum settlement payment considered capital in nature?
Answer 1
Yes.
Your right to seek compensation is an intangible capital gains tax (CGT) asset and your ownership of that asset ended when you accepted the lump sum to settle your claim.
In your case, the lump sum payment that you received has the characteristics of a capital receipt as you did not earn it and it does not directly relate to services that you performed. The payment is also a one-off payment (it does not have the elements of periodicity, recurrence or regularity). The relevant CGT event occurred in a specific income year, when deed of settlement was entered into. You will need to record any capital gain or loss in the year of income the deed was entered into.
Where the right was held for less than 12 months, you are not eligible to make discount capital gain.
Question 2
Are the legal expenses incurred considered to be capital in nature?
Answer 2
Yes
The nature or character of legal expenses follows the advantage that is sought to be gained by incurring the expenses, such as defending a right. In your case, the legal expenses were incurred to defend a right and are considered capital in nature.
This ruling applies for the following period:
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You were employed by an employer on a series of concurrent and revolving temporary contracts for several years.
The last contract you were offered was unfavourable and was on a take it or leave it basis for work you had previously performed.
As no agreement was reached regarding the terms of the contract you left your employment and filed an application for unfair dismissal. The employer disputed the claim and responded that you had no jurisdictional objection to make the application as you were not an employee.
The matter was heard during a particular income year and the employer's claim was dismissed.
You incurred legal expenses to prove you had standing to bring the action.
Subsequently, an out of court settlement was reached for a lump sum payment and a deed of settlement was signed on the basis that you would not pursue the matter any further with the state regulator. Payment was received in a later income year, more than 12 months after employment had ended.
Relevant legislative provisions
Income Tax Assessment Act 1997 Part 3-1
Income Tax Assessment Act 1997 section 102-5
Income Tax Assessment Act 1997 section 104-25