Issue
Does CGT event D1 in section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when a taxpayer enters into an agreement not to take any legal action in relation to the cessation of the payment of an allowance by another entity?
Decision
Yes. CGT event D1 in section 104-35 of the ITAA 1997 happens when a taxpayer agrees not to take any legal action in relation to the cessation of an allowance.
Facts
The taxpayer had for many years received an allowance from another entity.
In the 2002-03 income year it was decided that the allowance would no longer be paid. At that time the taxpayer signed a deed agreeing not to take any legal action in relation to the cessation of the allowance.
Upon signing the deed the taxpayer received a payment from the other entity.
Reasons for Decision
CGT event D1 in section 104-35 of the ITAA 1997 happens if you create a contractual right or other legal or equitable right in another entity. Subsection 104-35(3) of the ITAA 1997 provides that you make a capital gain from the event if the capital proceeds from creating the right are more than the incidental costs incurred in doing so.
CGT event D1 happened when the taxpayer created a right in the other entity to resist any legal action by the taxpayer in relation to the cessation of the allowance. The event happened when the agreement between the parties was made (subsection 104-35(2) of the ITAA 1997). The taxpayer made a capital gain from CGT event D1 equal to the difference between the payment received from the other entity and the taxpayer's incidental costs. Note: The payment may also be assessable as ordinary income under section 6-5 of the ITAA 1997, or as a bounty or subsidy under section 15-10 of the ITAA 1997. In either case subsection 118-20(2) of the ITAA 1997 would apply to reduce any capital gain the taxpayer made under CGT event D1.