Issue
Does CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen if an individual receives a lump sum payment to compensate for property losses suffered by their distant relatives during World War II?
Decision
Yes. The receipt by an individual of a lump sum payment to compensate for property losses suffered by their distant relatives during World War II causes CGT event C2 to happen.
The resulting capital gain must be taken into account in working out the individual's net capital gain or loss for the income year in which the payment is received. However, the capital gain is disregarded if the payment is received during the 2001-02 or later income year: subsection 118-37(5) of the ITAA 1997.
Facts
In January 2001, an Australian resident individual received a payment from the Commission pour l'indemnisation des victimes de spoliations intervenues du fait des législations antisémites en vigueur pendant l'Occupation (the Commission).
The Commission was established by the French Government to compensate victims and their families for property loss resulting from anti-Semitic legislation in force during the occupation of France by Germany during World War II.
The individual received the payment as compensation for property losses suffered by the individual's distant relatives. The right to claim the compensation arose after 19 September 1985.
Reasons for Decision
A CGT asset includes a legal or equitable right that is not property: paragraph 108-5(1)(b) of the ITAA 1997.
The CGT asset in this case is the right to be considered for a payment by the Commission. The rights of heirs under the Commission are derived claims. Any payment is worked out by reference to what would have been the entitlement of an original claimant, had they been alive to claim. There is no requirement that the underlying property, or underlying rights to compensation were passed to the claimant.
CGT event C2 happens when an intangible CGT asset is surrendered, cancelled or forfeited or similarly ends: section 104-25 of the ITAA 1997. In this case, the right ended when the Commission made a payment to the individual. A capital gain will arise if the capital proceeds from the ending are more than the right's cost base: subsection 104-25(3) of the ITAA 1997.
The capital proceeds from the CGT event are equal to the amount of the payment. As the individual did not pay any money or property to acquire the right, its cost base will include only incidental costs relating to the acquisition of the right or its ending. Payments made to a legal adviser in relation to receipt of the payment are an example of incidental costs.
A capital gain is reduced by any amount included in assessable income under another provision of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936) as a result of the CGT event: section 118-20 of the ITAA 1997.
No amount is included in the individual's assessable income under another provision as a result of the payment. In particular, as the payment is not made to compensate a loss of income, no amount is included in the individual's assessable income under subsection 6-5(2) of the ITAA 1997 as ordinary income. Consequently, the capital gain is not reduced under section 118-20 of the ITAA 1997.
A capital gain or loss is disregarded if it is made from a CGT event relating to compensation for any personal wrong, injury or illness suffered by a taxpayer or their relative: paragraph 118-37(1)(b) of the ITAA 1997.
However, the wrong for which the payment is made in this case is not a personal wrong, but a wrong in relation to property owned by the individual's distant relatives. Consequently, the capital gain is not disregarded under paragraph 118-37(1)(b) of the ITAA 1997.
As the capital gain arose during the 2000-01 income year it must be taken into account in working out the individual's net capital gain or loss for that year.
However, a capital gain or loss made during the 2001-02 or later income year from the ending of a right to seek compensation for property losses suffered during the Second World War may be disregarded: subsection 118-37(5) of the ITAA 1997. Any such payment is also exempt from income tax: section 23AL of the ITAA 1936.