Edited version of private advice

Authorisation Number: 1052255530764

Date of advice: 18 June 2024

Ruling

Subject: CGT - ex-gratia payments

Question 1

Are the ex-gratia payments to be included in the capital proceeds for the sale of the Property?

Answer

Yes.

Question 2

Will the CGT discount apply to the sale of the Property?

Answer

Yes.

This ruling applies for the following period:

1 July 20xx to 30 June 20xx

The scheme commenced on:

Xx/xx/20xx

Relevant facts and circumstances

You own an investment property since xx/xx/20xx located at the Property in equal proportion in ownership (50/50). You are not registered for GST.

The Property has been bought back by the local Authority due to extreme flood damages that occurred in March 20xx for $xxx. You are not registered for GST.

The Property was purchased the Authority due to extreme flood damages that occurred in March 20xx for $XXX as per the "Contract for the sale and purchase of land 20xx edition" (Contract for sale).

You will also receive an additional payment of $xxx from the Authority as per Clause X of the Contract. This payment is for any special value of the Property to you, any loss attributable to severance/disturbance, disadvantage resulting from relocation and any decrease (or increase) in the value of the Property.

On xx/xx/20xx you entered into an Ex-gratia Payment Deed (the Deed) with the Authority to receive an ex gratia payment of $XXX. The payment was made by the Authority as part of the XXX Program to assist the landowners affected by the 20xx flood. The Deed states that the Authority must make the Ex-gratia Payment to you on the Date of Completion (i.e., the date the Contract completes). You and the Authority both acknowledge that the Ex-gratia Payment is not consideration made by the Authority for the purchase of the Property under the Contract for sale.

The Contract was signed on xx/xx/20xx.

Under Clause 4 of the Deed, the Ex-gratia Payment is to be reduced by any amounts you receive in settlement of a claim for flood damage to the Property (Additional Insurance Payment) from your insurer in addition to the Insurance Benefit Amount you are to receive from the Authority.

To date, you have not received any payments from the Authority.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 54-45

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 subsection 115-25

Reasons for decision

Part 3-1 of the ITAA 1997 contains the general capital gains and capital loss provisions commonly referred to as the CGT provisions. CGT event A1 happens when you dispose of a CGT asset (subsection 104-10(1) of the ITAA 1997). You make a capital gain if the capital proceeds from the event are more than the assets cost base (refer to subsection 104-10(4) of the ITAA 1997).

CGT event A1 occurred upon the signing of the sale contract of the Property. The purchase price of $XXX represents sale proceeds from the disposal of the Property due to extreme flood damages that occurred in March 20xx.

While Disaster Recovery Allowances and Natural Disaster Relief and Recovery Arrangements payments are generally taxable, the tax treatment of a payment will depend on the specific circumstances of the payment (for more information, see www.ato.gov.au and type QC 67560).

When a taxpayer sells their property to the Authority under the Buyback Scheme, CGT Event A1 occurs. The proceeds are treated as the purchase price for the property, not a reimbursement. The amount received for a property may include the purchase price stipulated in the sale contract and an ex gratia payment which compensates the client for the loss of value of the property arising from the damage due to the flood event.

An ex gratiapayment is a payment made by an entity as a gesture of goodwill where there is no legal obligation to make the payment. Whether or not an ex gratiapayment is taxable depends on the nature of the payment. Where compensation is received for the disposal of an asset, although the amount is less directly related to the asset than payment of the purchase price, it is treated as capital proceeds. This approach is the 'look-through' approach, or 'underlying asset' approach.

Taxation ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts (TR 95/35), sets out the Commissioner's views on the capital gains tax (CGT) implications of compensation payments. As per TR 95/35 paragraph 4:

If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation.

Note that because participation in the Home Buyback scheme is voluntary, the rollover for compulsory acquisition will not apply.

Application to your circumstances

You received an offer for an ex gratia payment of $XXX as part of the XXX Program to assist the landowners affected by the 20xx flood. The Authority must pay the Ex-gratia Payment to you on the date the Contract completes. The payment is only available to you as part of the offer by the Authority to purchase the Property. As a result, the asset underlying the payment is the Property. Consequently, the ex gratia payment of $XXX is treated as capital proceeds.

The additional payment of $xxx will be made to you in compensation for any loss attributable to severance/disturbance, disadvantage resulting from relocation and any decrease (or increase) in the value of the Property. This payment is specifically included in the Contract for sale. As the underlying asset for the $xxx additional payment is the Property, it will also be included in capital proceeds.

As the two payments are not made in compensation for a personal injury, they are not exempt under section 54-45 of the ITAA 1997.

Therefore, the ex gratia payment of $XXX and the additional payment of $xxx form part of the capital proceeds used in the CGT calculations. Part IIIA applies to include in your assessable income a net capital gain made on the disposal of the Property.

The CGT discount will apply as the 12-month rule is satisfied as per section 115-25 of ITAA 1997.