Edited version of private advice

Authorisation Number: 1051855114996

Date of advice: 9 July 2021

Ruling

Subject: Undissected lump sum - reasonable apportionment

Question

Can the undissected lump sum settlement payment you received be reasonably apportioned in equal amounts between costs, interest, loss of shares and income?

Answer

No.

This ruling applies for the following period periods:

Period ended 30 June 20XX

Period ended 30 June 20XX

Period ended 30 June 20XX

Period ending 30 June 20XX

Period ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In 20XX, you and another taxpayer filed a Statement of Claim with the XXX Supreme Court (the Plaintiffs). Another taxpayer joined the action as a related person to the proceedings.

In 20XX, you reached an out of court settlement.

You received an out-of-court settlement comprising of an undissected lump sum payment under the Deed of Release.

The Deed of Release states that settlement payment will be paid over XX months.

The Deed of Release states that the settlement sum is inclusive of all legal costs, disbursements, fees, charges, taxes, duty and other costs (however termed).

The Deed of Release did not attribute a monetary amount for each component of the lump sum.

You contend that the payment should be apportioned equally between four components being: loss of shares, loss of income, legal costs and interest.

You have no ability to calculate the value of the components relating to the value of the shares and income as you were not given access to the company's financial statements and do not have a legal ability to access the company's financial statements.

You incurred legal costs of $xxxxxx.

You contend that the interest component would be more than 25% of the lump sum if based on the ATO annual benchmark interest rate and based on 75% of the lump sum received for the loss of shares, loss of income and legal costs.

You and another taxpayer were each paid 50% of the lump sum settlement payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subdivision 110-A

Reasons for decision

In your case, the relevant asset was the right to seek compensation in respect of the transfer of shares you claimed was void. A capital gains tax (CGT) event occurred when you entered into the settlement and disposed of the right.

Statutory income - capital gains

Section 102-5 of the ITAA 1997 provides that a taxpayer's assessable income includes a net capital gain. A capital gain or loss is made only if a CGT event happens. For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset.

A CGT asset is defined in paragraph 108-5(1)(b) of the ITAA 1997 as including a legal or equitable right that is not property. Taxation Ruling 95/35 Income tax: capital gains: treatment of compensation receipts considers the CGT consequences for compensation. Paragraph 70 of TR 95/35 provides that in determining the most relevant asset for which the compensation has been received, it is often appropriate to adopt a 'look-through' approach to the transaction which generates the payment.

The 'look-through' approach is defined in paragraph 3 of TR 95/35 to be the process of identifying the most relevant asset. It requires an analysis of all of the possible assets of the taxpayer in order to determine the asset to which the compensation amount is most directly related. If the amount of compensation is not received in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

CGT event C2

CGT event C2 happens when the ownership of an intangible CGT asset ends by the asset being satisfied or surrendered (section 104-25 of the ITAA 1997). A C2 event can apply where there is a release or discharge of a right to sue on the settlement of a legal dispute (See Re Coshott and FCT [2014] AATA 622).

Any capital gain or loss arising on the disposal of that right is calculated using the cost base of that right. The cost base of the right to seek compensation is determined in accordance with the provisions of subdivision 110-A of the ITAA 1997. Expenditure or an outgoing forms part of the cost base of a right to seek compensation if there is a direct and substantial link between the expenditure or outgoing and the arising of the right to seek compensation.

Application to your circumstances

In your case, you received an undissected lump sum payment under a Deed of Release. The Deed of Release did not apportion the payment you received into different components. And you told us you do not know the value of the shares you sought to recover; the damages and compensation amounts were never quantified and would be difficult to quantify; and the interest on damages is impossible to quantify. However, the legal costs you incurred related to the proceedings were $xxxxxxxx.

Based on these facts, we consider the compensation relates to the disposal of your right to seek compensation. The right to seek compensation was acquired at the time of the compensable wrong or injury and includes all the rights arising during the process of pursuing the compensation claim. A CGT event occurred when you entered into the Deed of Release.