1 Is the compensation amount you received assessable as a capital gain pursuant to section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. Question 2 If the full amount received is a capital gain, does the 50% Capital Gains Tax (CGT) discount apply in accordance with section 115-25 of the ITAA 1997? Answer Yes. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 1 July 20XX
The Deceased and their spouse were customers of a financial advice company (the Company). The Company was previously authorised as a wholly-owned, non-guaranteed subsidiary of an Australian bank (the Bank) between XX 20XX and XX 20XX. On XX XX 20XX, the Deceased's spouse passed away. In 20XX, the Australian Securities and Investment Commission (ASIC) commenced a review into the failure to deliver financial advice services to customers. On XX XX 20XX, the Deceased passed away. On XX XX 20XX, the Deceased's Estate received a refund amount from the Company. The lump sum amount received was $XX,XXX.XX. The Executor of the Estate attempted to contact the Company and the previous financial adviser to query the payment. The Executor has not received any guidance from either party. You are unsure if the amount received relates to the Deceased's Estate, or the estate of the Deceased's spouse. In XX 20XX, the Bank published documents explaining the purpose of the refund amount. You attempted to contact the Bank to seek further advice as to the components of the amount received.
You did not receive any documentation to explain how the amount received was calculated; nor any information to detail the components of the compensation received. You are unsure if the amount received is inclusive of: • A refund of advice fees • Interest component • Compensation for loss on investment • A mixture of these amounts. You understand that the payment was distributed to affected customers on a proportionate basis, and that the payment amount was undissected. You do not have access to the income tax returns of the Deceased and cannot determine if any previous tax deductions for financial advice fees were claimed by the Deceased or the Deceased's spouse.
Income Tax Assessment Act 1997 Section 102-5 Income Tax Assessment Act 1997 Section 102-20 Income Tax Assessment Act 1997 Section 104-25 Income Tax Assessment Act 1997 Section 108-5 Income Tax Assessment Act 1997 Section 115-25
Question 1 Is the compensation amount you received assessable as a capital gain pursuant to section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997)? Question 2 If the full amount received is a capital gain, does the 50% Capital Gains Tax (CGT) discount apply in accordance with section 115-25 of the ITAA 1997? Summary Your right to seek compensation is an intangible CGT asset and your ownership of that asset ended when you accepted the settlement amount. A CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including being released or cancelled (subsection 104-25(1) of the ITAA 1997). Although the deceased and then their estate were not aware that they held the right to seek compensation, the right was held for at least 12 months. Consequently, the 50% CGT discount applies to the capital gain in relation to that right as explain in subsection 115-25(1) of the ITAA 1997. Detailed reasoning Your assessable income includes your net capital gain for the income year as explained in section 102-5 of the ITAA 1997. Section 102-20 of the ITAA 1997 states that a capital gain or loss is made only if a CGT event happens.
Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. For income tax purposes, a compensation amount generally bears the character of that which it is designed to replace. Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts considers the CGT consequences for the receipt of the amount. TR 95/35 discusses various scenarios, including: • Disposal of the underlying asset, • Compensation for permanent damage to, or permanent reduction in value of, the underlying asset, and • Disposal of the right to seek compensation. TR 95/35 sets out at paragraph 204, that if the compensation is unable to be allocated on any reasonable basis (for example, because there is insufficient information on the claims made or the basis of acceptance of the compensation) we consider that the whole amount of compensation must relate to the disposal of the right to seek compensation.
Your right to seek compensation is an intangible CGT asset and your ownership of that asset ended when you accepted the settlement amount. At that time a CGT event C2 happens. CGT event C2 happens if your ownership of an intangible CGT asst ends in certain ways, including being released or cancelled (subsection 104-25(1) of the ITAA 1997). Discount capital gain Subsection 115-25(1) of the ITAA 1997 states that to be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event. Application to your circumstances You received a lump sum compensation payment and are unable to establish all components of the amount received. As a result, the whole amount is treated as being consideration received for the disposal of the right to seek compensation and causes a CGT event C2 to happen. The entire compensation payment received is a capital gain amount.
You received the payment during the 20XX financial year in respect of financial advice or investments that the deceased previously had. In your circumstances, the right to seek compensation was held by the deceased before passing to the deceased estate. Although the deceased and then their estate were not aware that they held the right to seek compensation, the right was held for at least 12 months. Consequently, the 50% CGT discount applies to the capital gain in relation to that right. In your case, we consider that it may be appropriate for each of the deceased persons to apportion the compensation received on a fair and reasonable basis, having regard to their respective share of the ownership interest in the capital gain. Objection rights If you discover that the adviser fees have been reported in previous financial years by either of the deceased persons, you can apply for an out of time objection. To apply for an out of time objection, you can ask for an extension of time by including a written request with your application. Search our website (www.ato.gov.au) for QC 33827 - Object to an ATO decision
for information on how to object to most decisions we make about your tax and super obligations and entitlements.