Edited version of private advice

Authorisation Number: 1051922629100

Date of advice: 23 February 2022

Ruling

Subject: CGT - inherited right to payment to share of parent's law practice receivables

Question 1

Are the amounts received by you from the entity, being your late parent's law firm, income according to ordinary concepts under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), or statutory income as a dividend under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.The payments received are capital payments and are not ordinary income or dividends.

Question 2

Are you taken to acquire a CGT asset being a right to payments when you became an Australian resident?

Answer

Yes. A right to receive payments is a CGT asset. You are deemed to have acquired the right for the market value of the receivables payable at the time when you became an Australian resident under section 855-45 of the ITAA 1997.

Question 3

Does a CGT event occur each time that a payment is received?

Answer

Yes. CGT event C2 occurs on each payment receipt.

Question 4

If "yes" to question (c), what is the cost base for the CGT asset?

Answer

The cost base of the part of the right to payment that is received on payment to you will be a part of the market value of the receivables, being their face value translated at the conversion rate existing at the time of becoming a resident. The CGT proceeds are translated at the time of receipt of the payment.

Question 5

Will the Commissioner simplify accounting between you and the Commissioner by treating the receivables due to you as your inheritance as a single asset, so that you effectively begin to account for a capital gain on the collective asset once the cost base is exhausted?

Answer

No. CGT event C2 is calculated separately for each payment that is received.

This private ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

19 January 20XX

Relevant facts and circumstances

Your tax agent advised that:

•         You are the child of a deceased lawyer ("the deceased").

•         The deceased had XX children, you, and your XX siblings:

•         The deceased was the largest shareholder a law firm in Country A where the deceased conducted the practice.

•         The practice was almost exclusively litigating on a contingency fee basis

•         You and your siblings are the only mandatory beneficiaries of the deceased estate.

•         You inherited a right to payment of a share of the deceased's law practice receivables.

•         Litigation established that you did not have a right to share in the practice or assets of the practice but only a right to be paid.

•         You began receiving payments from the right acquired from death of your parent.

•         The law firm does have some separate existence, but it is not a corporation as understood in Australia.

•         Your tax agent advises that you are simply receiving your inheritance, albeit as and when the inheritance can be paid to you.

•         You believe that since you never were, and are not, a shareholder of the law firm, there is no assessable dividend in terms of section 44 of the ITAA 1936.

•         You became a resident on XXXX and using a foreign exchange rate applicable on the next business day, the total value of the receivables from the law firm to which you were entitled amounted to XXXX.

•         After your parent died, two of your siblings, who were practising lawyers, decided to continue the law firm, you continue to receive amounts from the law firm in discharge of its obligations to pay you even after you became an Australian resident.

Relevant legislative provisions

Income Tax Assessment Act 1997, s6-5

Income Tax Assessment Act 1997, s116-20

Income Tax Assessment Act 1997, s855-10

Income Tax Assessment Act 1997, s855-15

Income Tax Assessment Act 1997, s855-45

Income Tax Assessment Act 1936, s44

Income Tax Assessment Act 1936, s47

Income Tax Assessment Act 1936, s109

Income Tax Assessment Act 1936, s255-10

Income Tax Assessment Act 1936, s388-55

Reasons for Decision

Issue

CGT on income from overseas inherited as a right to payment of a share of parent's law practice receivables from a non-common law jurisdiction country.

Summary

Based on the facts there would be no capital gain tax consequences for the taxpayer.

Detailed reasoning

Subsection 6-1(1) of the ITAA 1997 provides that a taxpayer's assessable income includes ordinary income and statutory income.

Section 6-5 of the ITAA 1997 states that your assessable income includes income according to ordinary concepts derived by you as an Australian resident directly or indirectly from all sources, whether in or out of Australia during the income year.

Income according to ordinary concepts is not defined in the taxation legislation. The characteristics of ordinary income have been developed by case law and generally fall into three categories:

•         income from providing personal services

•         income from property, or

•         income from carrying on a business.

Paragraph 85 of Taxation Ruling TR 2006/3 states that case law has established various guidelines to assist in determining the nature of a receipt. Specifically, the guidelines include:

•         the nature of a payment is determined by examining the character of the payment in the hands of the recipient, and

•         a payment by subsidy to replenish or augment the recipient's capital is not income under ordinary concepts as it is not a product or incident of the recipient's income producing activity.

In applying the principles established in relevant cases as referred in TR 2006/3, it is our view that the payments made to you under the Brazilian Law which provides for property to pass to relatives, are not income under ordinary concepts as it is not a product or incident of your income producing activity. Instead, the payments are capital and is received as a right to payment of a share of your parent's law practice receivables.

Therefore, the receipt of the payment is capital in nature and is not assessable as ordinary income under section 6-5 of the ITAA 1997.

A CGT asset is defined in section 108-5 of the ITAA 1997 and includes any kind of property. Specifically, a right to payment created by contract is a CGT asset.

Paragraph 104-25(1)(b) of the ITAA 1997 states that CGT event C2 happens of an intangible CGT asset ends by the asset being released, discharged or satisfied.

Relevantly, your right of the to receive the payment is discharged or satisfied each time you receive a payment resulting in CGT event C2 happening to that part of the right.

You make a capital gain if the capital proceeds for the part of the right that is satisfied is more than the cost base of that part of the right, subsection 104-25(3) of the ITAA 1997.

Therefore, CGT event C2 will happen on each occasion that you receive a payment and a capital gain or loss amount needs to be calculated for each payment received.