Edited version of private advice

Authorisation Number: 1052202243016

Date of advice: 15 December 2023

Ruling

Subject: Settlement payment

Question

Is the amount received from your de facto ex-spouse, of approximately $X,XXX,XXX, assessable as income under section 6-5 or section 10-5 of the Income tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian citizen and tax resident of Australia.

You have lodged income tax returns in Australia, the last being for the 20XX financial year.

You are residing in Australia.

You do not currently own or have previously owned any assets overseas.

You were in a relationship with your de facto ex-spouse, whereby you had a relationship for many years.

Your de facto ex-spouse is a non-resident of Australia since 20XX. They reside in Country A.

Between 20XX and MM 20XX you were employed as a silent director for a short period by a company linked to the company your de facto ex-spouse was working in a senior role. Your role was to provide administration services in transferring monies from customers' accounts in Australia to the exchange. You resigned from this position in MM 20XX.

Between 20XX and 20XX your relationship with your de facto ex-spouse was long distance and you received multiple payments from them during this time. These payments were made to support you while you were living in Australia and they in Country A. It was stated that these amounts were paid to support a partner in a relationship.

You and your de facto ex-spouse separated in approximately MM 20XX. At that time, you had plans to reconcile so did not settle at this point.

The separation was not subject to any legal or court proceedings.

On DD MM 20XX, and after you had permanently separated from your de facto ex-spouse, they transferred approximately $X,XXX,XXX in cryptocurrency from their account into your personal storage wallet.

The payment was to ensure that after your separation you would be financially supported. The cryptocurrency was the property of your de facto ex-spouse, and they had full right and authority to dispose of the funds as they saw fit.

You have advised that the payment was for the purpose of a settlement, whereby accepting the payment, you would not pursue any family law claims to beneficial ownership of your de facto ex-spouse's wealth.

Your de facto ex-spouse conveyed full beneficial ownership in the cryptocurrency to you with no obligations or liabilities attached to you on its receipt. There were no conditions regarding the transfer of the cryptocurrency.

The payment of cryptocurrency from your de facto ex-spouse to yourself had no connection to any services, efforts or activities provided by you, nor was it connected with your employment.

The cryptocurrency was transferred from your de facto ex-spouse to your storage wallet and was later liquidated, and the funds deposited into your bank account. The amount was approximately $X,XXX,XXX.

You had not previously been involved in cryptocurrency trading or investment, before receiving the cryptocurrency payment from your de facto ex-spouse.

A gift deed was provided; however, it is our understanding that this deed was not executed.

You have no company interests or involvement in any other Australian or overseas company except for a company that was set up in Country B by your de facto ex-spouse. This company was never used for any purpose and remains dormant.

You and your de facto ex-spouse do not currently or previously have joint ownership of assets either in Australia or overseas.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-6

Income Tax Assessment Act 1997 section 10-5

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

Income Tax Assessment Act 1997 subsection 6-15(1)

Income Tax Assessment Act 1997 subsection 6-10(2)

Income Tax Assessment Act 1997 subsection 118-75(1)

Income Tax Assessment Act 1997 section 102-5

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include 3 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.

You do not have an employment relationship with your former spouse and therefore you did not receive the payment in the capacity of an employee. Rather the lump sum relates to a relationship settlement between you and your former spouse. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the divorce settlement between you and your former spouse, rather than from any services performed. Therefore, the lump sum payment is not ordinary income and is not assessable under subsection 6-5(2) of the ITAA 1997

Statutory income is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists those provisions about assessable income.

This includes section 102-5 of the ITAA 1997, being capital gains.

We are of the view that in accepting the cryptocurrency payment, you have disposed of the right to seek compensation or the right to a chose in action. Taxation Ruling TR 95/35 provides that a compensation receipt, or compensation, includes any amount (whether money or other property) received by a taxpayer in respect of a right to seek compensation or a chose in action, or any proceeding instituted by the taxpayer in respect of that right or cause of action. Therefore, we consider that the right to seek compensation or the right to a chose in action is an asset for the purposes of the CGT provisions. According, the disposal of such rights will trigger CGT event C2.

Subsection 118-75(1) of the ITAA 1997 provides an exemption for a capital gain or a capital loss from CGT event C2 (ending of asset) happening in relation to a right that relates directly to the breakdown of a marriage or a relationship where certain conditions are met.

These conditions are:

•                     the capital gain or the capital loss is made in relation to a right that relates directly to the breakdown of a marriage, a de facto marriage or a relationship

•                     at the time of the CGT event, the parties involved are separated and there is no reasonable likelihood of cohabitation being resumed, and

•                     the trigger event happened because of reasons connected directly with the marriage or the relationship breakdown.

The Commissioner is satisfied that the above conditions have been met, so therefore you can disregard in full any capital gain or capital loss made on receipt of the settlement payment from your de facto ex-spouse.

In your case, there is no other provision listed under section 10-5 of the ITAA 1997 which applies to the lump sum amount you received, so the lump sum payment is therefore not considered to be statutory income.

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income and is not statutory income, it is not assessable income. Therefore, the lump sum is not assessable and is not required to be included in your tax return.