Edited version of private advice

Authorisation Number: 1052275156004

Date of advice: 17 July 2024

Ruling

Subject: Settlement proceeds and cost base

Question 1

Will the proceeds of the settlement represent assessable income of the Trust?

Answer

No. The payment received on settlement will not have the characteristics of ordinary income and will be a capital amount.

Question 2

Will acceptance of the settlement amount trigger CGT event C2 for the Trust?

Answer

Yes.

CGT event C2 occurs if your ownership of an intangible CGT asset ends by the asset:

•         being redeemed or cancelled

•         being released, discharged or satisfied

•         expiring

•         being abandoned, surrendered or forfeited

•         if the asset is an option - being exercised, or

•         if the asset is a convertible interest - being converted.

The right of the Trust to seek compensation due to the incorrect advice received is an intangible CGT asset.

The right arose at the time the state revenue department made the assessments against the Trust, which was a consequence of the incorrect advice. It does not matter that the advice was provided to the prospective trustees of the Trust prior to the Trust being established.

Consequently, entering into the Deed of Settlement is a cancellation of those rights that arose due to the actions of the conveyancers.

Question 3

Are the amounts paid to the state revenue department and paid for legal fees included in the cost base of the right to seek compensation?

Answer

Yes.

The Commissioner is satisfied that the amounts paid to the state revenue department and paid for legal fees are included in the cost base when calculating any CGT liability.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts states that 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.

If the right to seek compensation arises in respect of a monetary loss of the taxpayer, the amount of that loss is included in the cost base of the right to seek compensation for that loss. It is an amount which the taxpayer has paid or is required to pay in respect of the acquisition of the right to seek compensation for having to incur the expenditure.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Trustees of the Trust are considering settlement of legal action taken against conveyancers for negligent advice given about the transfer of a property to the Trust.

The advice given by the conveyancers was that the property transfer would be exempt from Transfer Duty under certain relief provisions.

This advice was given via e-mail prior to the property transfer.

This advice was given to the trustees in their personal capacities, not in their capacity as trustees for the Trust, as the Trust had not yet been established at the time the advice was provided.

The advice eventually proved to be incorrect, leading to Transfer Duty and interest being levied on the property transfer (against the Trust, not against the trustees). Furthermore, an additional surcharge was levied on the Transfer Duty and subsequent Land Tax because of the way the trust deed was written.

As a consequence, the Trustees in their capacity as Trustees took out a loan against the property to pay the state revenue department the assessments levied against the Trust and to also pay legal fees.

It has been agreed that the legal advice was negligent, and the conveyancer has proposed a settlement in the amount representing the payment of the Transfer Duty and related amounts.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 110-25