Issue
Will a lump sum amount to be paid to the taxpayer as compensation for property losses suffered by the taxpayer's distant relatives during World War II, be included in their net capital gain calculated under section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The amount to be paid to the taxpayer to compensate for property losses of their distant relatives during the World War II will be included in the taxpayer's net capital gain calculated under section 102-5 of the ITAA 1997.
Facts
The taxpayer is to receive a payment from the Commission pour l'indemnification des victims de spoliations intervenues du fait des legislations antisemites en vigueur pendant l'Occupation (the Commission). The Commission was established by the French Government to compensate the families of victims of the occupation of France by Germany in the World War II who suffered property loss as a result of the occupation.
The taxpayer will receive a lump sum compensation payment for the following property losses: • furniture of the family; • money and value taken from them when interred in a concentration camp; and • business carried on by the family.
The property losses were suffered by the taxpayer's distant relatives.
The right to claim the compensation payment occurred after 19 September 1985.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
The lump sum compensation payment is to be made to compensate families of victims for property losses suffered during World War II. The payment is not made to compensate for loss of income. Accordingly, subsection 6-5(2) of the ITAA 1997 will not apply as the payment is a capital amount and not ordinary income.
Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income also includes statutory income amounts that are not ordinary income but are included in assessable income under another provision. The assessable income of a resident taxpayer includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997).
Section 10-5 of the ITAA 1997 lists those provisions about assessable income that are not ordinary income. Included in this list is section 102-5 of the ITAA 1997 which provides that a taxpayer's assessable income includes a net capital gain calculated under that provision.
In order to make a capital gain, a capital gains tax (CGT) event must happen. Section 104-25 of the ITAA 1997 provides that a CGT event C2 happens when an intangible CGT asset is surrendered, cancelled or forfeited or similarly ends. A 'CGT asset' is defined to include a legal or equitable right that is not property (paragraph 108-5(1)(b) of the ITAA 1997).
The rights of heirs under the Commission are derived claims. Any payment is worked out by reference to what an original claimant (if they were alive to claim) would have been entitled to. There is no requirement that the underlying property, or underlying rights to compensation had been passed to the heir claimant. The CGT asset is the right to be considered for a payment by the Commission, with the suffering of property loss in the past being an eligibility requirement for that right.
This right was acquired by the taxpayer after 19 September 1985 (assets acquired prior to this date do not attract CGT consequences when disposed of). The right to a payment from the Commission is satisfied when the payment is made by the Commission.
Paragraph 118-37(1)(b) of the ITAA 1997 provides that a capital gain or capital loss from a CGT event is disregarded if the compensation is received for any personal wrong, injury or illness that is suffered by the taxpayer or their relative.
The wrong for which the payment is made is not a personal wrong, but a wrong in relation to property owned by the taxpayer's distant relatives, Further, 'relative' is defined in subsection 995-1(1) of the ITAA 1997 to mean: • the person's spouse; • the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of that person, or of that person's spouse; or • the spouse of a person referred to in the second point.
As the distant relatives are none of those listed in the definition of 'relative' in subsection 995-1(1) of the ITAA 1997, paragraph 118-37(1)(b) of the ITAA 1997 will not apply.
Consequently, the taxpayer's net capital gain under section 102-5 of the ITAA 1997 includes the capital gain from CGT event C2 happening to their right to receive a payment for property losses suffered by their distant relatives.