Edited version of private advice

Authorisation Number: 1052040467307

Date of advice: 5 October 2022

Ruling

Subject: CGT - losses

Question 1: Are the Payments you received in relation to Organisation X ordinary income?

Answer: No.

Question 2: Did you make a capital loss in relation to your capital gains tax assets held with Organisation X?

Answer: Yes.

This ruling applies for the following period

Income year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You entered a contract (the Contract) to purchase an overseas property (the Property) from Company X several years prior to the start of the ruling period. Under the contract you were to pay a deposit amount and pay the specified balance amount after a nominated period of time.

You made several payments to Company X, including transfer fees, being the deposit amount (the Deposit) in accordance with the Contract.

After a period, you entered into a Loan Agreement with Company X. Under the Loan Agreement you lent Company A an amount of money (Amount A) and were to receive a specified percentage of interest per annum, with bonuses being paid to you at specified periods during the term of the loan. Amount A was to be repaid to you several years after the date of the Loan Agreement.

Company X went into administration, which was prior to the date you were to pay the balance for the purchase of the Property under the Contract, and prior to the end of the loan period for the Loan Agreement.

You prepared a Proof of Debt claim for the amounts you paid in relation to both the Contract and the Loan Agreement.

You received two payments (the Payments) from the joint administrator. The Payments were undissected and did not identify to what extent each payment amount related to either of your claims.

You have not received, and will not receive, any further payment/s in relation to the Contract and/or the Loan Agreement.

Company X was dissolved some months after you had received the Payments.

You no longer own any capital gains tax assets in relation to your dealings with Company X.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subsection 110-25(2)

Income Tax Assessment Act 1997 Subsection 110-55(2)

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Ordinary income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

•         are earned

•         are expected

•         are relied upon, and

•         have an element of periodicity, recurrence or regularity.

Statutory income

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income.

Net capital gains are included as assessable income under subsection 102-5(1) of the ITAA 1997.

Capital gains tax

The general capital gains tax (CGT) provisions are set out in Parts 3-1 and 3-3 of the ITAA 1997.

Under the CGT provisions a taxpayer will make a capital gain or loss only if a CGT event happens to a CGT asset.

Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. The notes to section 108-5 of the ITAA 1997 state that a debt owed to a taxpayer and a right to enforce a contractual obligation are both viewed as being CGT assets.

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset. The gain or loss is made at the time of the CGT event.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered, forfeited or expiring.

The time of the CGT event C2 is when you enter into the contract that results in the asset ending; or if there is no contract - when the asset ends. You make a capital loss when a CGT event C2 occurs if the capital proceeds are less than the CGT asset's reduced cost base.

Subsection 110-55(2) of the ITAA 1997 states that all of the elements of a reduced cost base will be the same as those for a cost base, with the exception of the third element.

The first element of a cost base will be the money you paid, or are required to pay, to acquire the CGT asset, and the market value of any other property you gave, or are required to give, in respect of acquiring the CGT asset under subsection 110-25(2) of the ITAA 1997.

To determine if a CGT event happens in respect of a compensation payment it is necessary to consider the nature of the asset to which the compensation payment relates.

TR 95/35 Income tax: capital gains: treatment of compensation receipts discusses the CGT implications for compensation receipts.

TR 95/35 discusses the various scenarios, including:

•         disposal of the underlying asset,

•         compensation for permanent damage to, or permanent reduction in value of, the underlying asset, and

•         disposal of the right to seek compensation.

TR 95/35 outlines that if the compensation receipt relates to more than one relevant asset, the compensation needs to be apportioned between those assets. If the taxpayer allocates amounts between different assets on a reasonable basis, we will generally accept that basis of allocation.

Application to your situation

You entered into the following with Company X and obtained a CGT asset in relation to both:

•         The Contract entered to purchase Property, paying the Deposit, with the balance of the purchase price to be paid several years after the Contract was entered into; and

•         A Loan Agreement for the purpose of earning a specified percentage of interest per annum plus bonus amounts at specified times during the loan, with the repayment of Amount A on a specified date.

Company X went into administration, and you did not pay the balance in relation to the purchase of the Property in accordance with the Contract. You also did receive the repayment of Amount A in relation to the Loan Agreement.

During the ruling period:

•         You received the Payments, consisting of several payments, in relation to the CGT assets you held with Company X

•         You did not receive any further payment/s during the ruling period, and will not receive any further payment/s in future income years, and

•         Company X was dissolved.

In your situation, the Payments were not earned by you as they did not relate to services performed, or to your employment duties with your employer. Additionally, they also did not have an element of recurrence or regularity. Therefore, the Payments did not have the characteristics of ordinary income and will not be assessable under section 6-5 of the ITAA 1997.

You entered into the Contract to purchase the Property for investment purposes. It is viewed that the debt owed to you in respect of the Loan Agreement was not a personal-use asset as the primary purpose for you entering into the Loan Agreement was to promote and enhance your income earning capacity in the form of interest and bonus payments that you would receive under the Loan Agreement.

Therefore, it is viewed that the Payments relate to the disposal of your CGT assets held with Company X, being your CGT assets held in relation to the Contract for the purchase of the Property and the Loan Agreement, which are capital in nature.

Based on the information provided:

•         a CGT event C2 occurred in relation to the CGT assets you held with Company X as you no longer hold the assets. The time when CGT event C2 occurred was when your CGT assets ended, with the latest date for that to occur being the date Company X was dissolved

•         The Payment consisted of several payments, being total capital proceeds received for both CGT assets; and

•         you made a capital loss in relation to the CGT assets you held with Company X during the ruling period.

Your capital loss for each CGT asset will be calculated by reducing the capital proceeds received in relation to each of them by the reduced cost base of each CGT asset.

The first element in the reduced cost base for each CGT asset will be the amount you paid Company X as follows:

•         The Deposit for the CGT asset held in relation to the Contract; and

•         Amount A for the CGT asset held in relation to the Loan Agreement.

Note: The Payments were undissected, with no apportionment to account for the different components that were relevant to each of your CGT assets. Therefore, you will need to apportion each payment, being the capital proceeds, to account for each of your CGT assets as on reasonable basis, such as on a value basis.