Law Institute Journal (Victoria)
|
|
Home
| Databases
| WorldLII
| Search
| Feedback
Law Institute Journal (Victoria) |
|
by BETTINA EVERT
The Australian Taxation Office released income tax ruling TR 95/35 earlier this year to a chorus of complaints about its effects. he 80 page document establishes in some detail the view of the Tax Office in relation to the effect of CGT on compensation payments received by tax-payers by way of insurance policies, court proceedings or settlements arising from alternative dispute resolution (such as mediation). Compensation payments can be made by government authorities and through private resolution of disputes.
The ruling discusses in great detail various aspects of Part IIIA of the Income Tax Assessment Act (the ITAA) and includes 30 pages of useful examples, some of which are reproduced here. Although the ruling is difficult to read, it is recommended that practitioners do so in order to obtain a better understanding of the Tax Office's view. The most important things to remember are to:
Every case will depend on its own facts, and if you have any doubts you should obtain advice from your taxation specialist prior to initiating proceedings.
This paper attempts to establish in plain English:
the circumstances in which practitioners need to warn their clients about consequences of any settlement proceeds;
The tax is triggered by sl6OL of the ITAA which states that Part IIIA applies in respect of every disposal by a resident on or after 20 September 1985 of an asset, whether situated in Australia or elsewhere, and every disposal by a non-resident of a taxable Australian asset (e.g. land owned in Australia), subject to exemptions allowed in the Act.
In general terms, CGT is paid when an asset purchased or obtained after 20 September 1985 is disposed of for a sum greater than the purchase price or "cost base". The tax is not a separate tax; rather the gain is added to the assessable income of the taxpayer in the year that it accrues and tax is paid on the overall amount. To a high earning individual this could result in a loss of approximately 50 percent of the gain. It is thus extremely important when making a claim for damages that the claim is broken down into distinct categories and that settlement agreements entered into also contain a breakdown of all amounts paid and the reasons for their payment. Without this, your client may end up paying CGT at a higher rate or paying the tax on sums which need not be assessable.
The provisions catch all gains that arise on the disposal of assets, whether those gains are of a capital nature or not. Any capital gain arising under Part IIIA is, however, reduced to the extent that the gain has been assessed under any other part of the Act. This is again subject to certain exemptions and exceptions.
For the purposes of CGT "asset" means "any form of property and includes: (a) any of the following:
(i) an option;
(ii) a debt;
(iii) a chose in action;
(iv) any other right;
whether legal or equitable and whether or not a form of property;
(aa) goodwill or any other form of incorporeal property; . . . " (s160A).
Therefore a right, even one not recognised as property, would fall within this description. The right to sue has been recognised by the High Court as "property" for the purposes of s5l(xxxi) of the Commonwealth Constitution. In a joint decision in Georgiadis v AOTC,' Mason CJ, Deane and Gaudron JJ confirmed previous High Court decisions on the matter when they said:
... `property' as used in paragraph 51 (xxxi) extends to every species of valuable right and interest including . . . `choses in action', `money and the right to receive a payment of money'. Clearly, a right to bring an action for damages for negligence is a valuable right."
rtis v Wilcox,' which held that a claim in negligence causing personal injuries is a chose in action, although a personal one. A personal chose in action is not assign-able. It has been suggested that as it is unassignable, a personal chose in action is not an asset for the purposes of s160A. The Tax Office rejects this suggestion (see para 56 of the ruling), which seems to have no basis, given the object of the tax and the broad definition of "asset" under the ITAA.
Section 160M lists the various ways in which "disposal" can occur for the purposes of the Act; in particular note that it refers to changes in legal and beneficial ownership.
A change in ownership is taken to have occurred, among other things, "in the case of an asset being a debt, chose-in-action or any other right, or an interest or right in or over property [when there is] cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment at law or in equity, of the asset."
Consequently, the payment of a judgment debt or settlement of a claim will constitute a release, discharge or satisfaction of a claimant's rights against the defendant. This payment will be regarded as a disposal of the asset by the owner of the asset - the claimant.
In addition, under sl6OM(7), where a person "who owned the asset at the time of the act, transaction or event, has received, or is entitled to receive, an amount of money or other consideration by reason of the act, transaction or event (whether or not any asset was or will be acquired by the person paying the money or giving the other consideration) including but not limited to an amount of money or other consideration -
(i) in the case of an asset being a right - in return for refraining from exercising a right; or
(ii) for use or exploitation of the asset; the act, transaction or event constitutes a disposal by the person who received, or is entitled to receive, the money or other consideration of an asset created by the disposal
The cost base is the cost of the asset to the person either disposing of it or, in limited circumstances where the person has lost value in it, prior to receipt of the sup-posed "capital gain". It may well be that once matters of interest and costs are calculated into the equation an anticipated capital gain in fact becomes a capital loss. Whether a deduction for that capital loss can be claimed in those circumstances will depend on further advice from your tax adviser. Generally speaking, capital losses may only be used to reduce capital gains made in the same, or future, tax years.
Under s16OZH(1)(a), the cost base to a taxpayer of an asset "is the sum of:
(a) the amount of any consideration in respect of the acquisition of the assets;
(b) the amount of the standard costs to the taxpayer of the acquisition of the asset;
(ha) except where the asset is a personal use asset of the taxpayer - the amount of non-capital costs to the taxpayer of the ownership of the asset;
(c) the amount of any expenditure of a capital nature incurred by the tax-payer to the extent to which it was incurred for the purpose of enhancing the value of the asset and is reflected in the state and nature of the asset at the time of disposal of the asset;
(d) the amount of any expenditure of a capital nature incurred by the tax-payer to the extent to which it was incurred in establishing, preserving or defending the taxpayer's title to or a right over, the asset; and
(e) the amount of the incidental cost to the taxpayer of the disposal of the asset."
Paragraph 104 of the ruling states that "if the right to seek compensation arises in respect of a monetary loss to the taxpayer (e.g. in respect of a claim for a breach of contract as a result of which the taxpayer must incur additional expenditure), 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 to the acquisition or the right to seek compensation for having to incur the expenditure."
When the compensation is received for the loss of an underlying asset, the compensation will be regarded as consideration for the disposal of that asset. Any resulting gain will be calculated with reference to the indexed cost base of that underlying asset. If the compensation is received on or after 20 September 1985 for the permanent reduction in value of a post-CGT asset (but the asset continues to exist) the compensation will be treated as the recovery or replacement of the cost of the asset. The cost base will be reduced by the compensation amount.
Example 1
The taxpayer purchased a two hectare property in January 1987 for $300,000. Since that date the property has not been used for income producing purposes. In May 1994 one hectare was compulsorily acquired by the state government which paid $180,000 compensation. A qualified and independent valuer estimated the value of the one hectare strip in 1987 at $120,000.
Result: The compensation was received for a part disposal of the land. The one hectare was nominally part of the tax-payer's principal residence and would normally be exempt from CGT. However, s16OZZQ(4) operates to impose CGT on the disposal of the land when it is disposed of separately to the dwelling.
Indexation of the part of the land disposed of applies from January 1987.
|
Consideration:
|
$180,000
|
|
less indexed cost base ($120,000 x 1.3666)
|
$163,920
|
|
Capital gain:
|
$16,080
|
Note: In this case the taxpayer could apply for rollover relief under s16OZZK as the disposal was by way of compulsory acquisition.
If the asset was acquired after 19 September 1985, either a capital gain or capital loss may arise.
Example 2
On 25 August 1987 the taxpayer commenced a delicatessen in a beach resort. On 2 February 1992 the local newspaper incorrectly reported that the taxpayer had been fined for infringing health regulations in preparing food. Consequently, sales dropped dramatically and the taxpayer was forced to incur substantial expenses for marketing and advertising to reassure customers that the report was incorrect.
On 4 July 1993 the taxpayer commenced an action to sue for defamation. In March 1994 the matter went to court and the parties agreed to settle the matter. The newspaper agreed to print an apology and to pay damages of $110,000:
The taxpayer's legal expenses were not paid by the newspaper.
Result: The $20,000 paid as compensation for personal injury is exempt from CGT under s16OZB(1).
The $30,000 is for reduction in the value of an asset - goodwill. As the asset has not been disposed of, its cost base will be reduced until it reaches nil. In this case the cost base is $1000 (i.e. a reasonable portion of the legal costs). The balance of $29,000 is received tax free.
The balance of the compensation (i.e. $60,000 less the remaining portion of the legal costs) will be assessable under the general income provisions and consequently would be exempt from CGT under s16OZA(4).
In May 1987 the taxpayer purchased land for $150,000 on the basis that the local council had approved the land for subdivision. In October 1993 the taxpayer lodged a development application and was advised that the original approval for subdivision was refused due to inaccurate information submitted on the application.
The taxpayer sued the seller for damages and in February 1994 received $15,000 compensation.
Result: The cost base of the underlying asset is reduced to $135,000, i.e. $150,000 less the compensation received of $15,000, which relates to the permanent reduction in the value of the land. The cost base adjustment is made to the unindexed total acquisition cost of the asset.
Example 4
On 4 July 1989 the taxpayer acquired a rental property and decided to sell it in January 1990. A buyer indicated on 15 March her willingness to acquire the property for $200,000. The contracts were exchanged on 10 July 1990, but the sale was not finalised because of a delay in receiving a clearance from one of the local authorities. The buyer later exercised her right under the contract to repudiate it and claim a refund of her deposit.
The taxpayer commenced legal action against his legal advisers seeking damages for negligence. On 17 January 1991 he received compensation of $95,000.
Result: The underlying asset is not the property as there has been no disposal of, or permanent damage to it. The relevant asset is the taxpayer's right to seek compensation, which was acquired in July 1991 when the action became apparent.
The cost base of the right to sue was nil plus legal costs. The balance (i.e. $95,000 less the cost base) would be assessed as a net capital gain in the taxpayer's 1992 income tax return.
The recent ruling also discusses the consequences of a party receiving either a further sum to cover the CGT that might be payable or an indemnity for any further CGT.
Paragraph 120 of the ruling states:
"We also consider that if the amount is received to `top-up' an amount of compensation for any potential CGT liability that top-up amount represents part of the consideration received by the taxpayer `as a result of or in respect of the disposal' of either the underlying assets or the right to seek compensation as the case may be." (See s16OZD.)
There have been a number of decisions by various courts in the past relating to the effect of CGT on judgments or settlements. Two of these are discussed below in light of the Tax Office ruling.
Provan v HCL Real Estate Ltd' was a decision of the NSW Supreme Court by Rolfe J. Mr Provan was the owner of property acquired before 20 September 1985. He authorised the defendant to submit that property for sale at public auction in 1988, not long after the property was first on the market. The defendant advised him that there was only limited interest in the property and that the only offer to purchase was from a syndicate that was not prepared to attend the auction. The plaintiff consequently sold the property to the syndicate but subsequently discovered that other parties had been interested in purchasing the property at auction at a higher price than that for which it was sold ($1.95m). The plaintiff sued for breach of contract and breach of fiduciary duty.
The Court held that the plaintiff was entitled to damages in the sum of $955,450 which was the difference between what the property would likely have sold for at public auction and its value at the time of sale.
The plaintiff submitted that he might be liable to pay CGT on any judgment. His Honour was of the view that he could not make any assessment of that amount as the decision he made would not be binding on the tax authority. However, he did order that if the plaintiff was held liable to pay CGT on the judgment, then he was en-titled to be indemnified for that amount, together with any costs, by the plaintiff.
But would CGT in fact have been pay-able?
Under s160U, "where the asset was acquired or disposed of otherwise than under a contract, the time of acquisition or disposal shall be taken to have been at the time when the change in the owner-ship of the asset that constituted or gave rise to the acquisition or disposal occur-red".
In this case the asset was acquired at the time that the right to sue accrued, i.e. the time of the breach of contract and breach in fiduciary duty - 1988. But when the case is examined in light of the recent ruling and one takes into account the cost base of this asset, i.e. the loss to Mr Provan
brought about by the breach of contract, plus his legal costs (not all of which he would have recovered from the plaintiff), it is submitted that there would be no tax payable on the sum received. The "gain" was in fact merely replacing the loss caused by others.
Tuite v Exelby & Others4 was a decision of the Supreme Court of Queensland. Mr and Mrs Tuite were directors and share-holders of Wenmar Pty Ltd, a stockfeed producing company. The first and second defendants, also directors and share-holders of that company, agreed to sell their shares in Wenmar to the first plaintiff, to resign from all positions held in Wenmar and to enter into a restrictive covenant agreement not to engage or be concerned or interested in any stockfeed production business in the defined areas for a period of two years. This agreement was entered into on 11 May 1989.
In September 1989 a company con-trolled by the parents of the first defend-ant, Cradex, began operating a stockfeed mill within the area defined by the restrictive covenant. The plaintiffs alleged that Cradex:
The plaintiffs also claimed any award for any CGT,payable in respect of the damages on the basis of compensation for a reduction in the value of the shares would more than likely be an assessable capital gain by virtue of sl6OM(7) and sought further payment to compensate for that tax.
There was judgment for the plaintiffs, including the sum of $808,940 for reduction in the capital value of shares in Wenmar. His Honour decided that these shares were an asset for the purposes of sl6OM(7a), that there was a deemed disposal of that asset by virtue of that section and that the amount of $808,940 would be subject to CGT. In those circumstances, His Honour also awarded a further $517,191, being the amount calculated as tax on the original sum ordered. The plaintiffs also had to give an undertaking that in the event that the tax was assessed at less than $517,191 the plaintiffs would refund the relevant amount to the defence.
Since the giving of that decision sl6OM(7) has been amended, although its effect is broadly the same. But would CGT actually have been payable? With reference to the ruling, did the plaintiffs not merely recover what they had lost - the reduction in the capital value of the shares? In those circumstances CGT would not have been assessed. Note, however, that if the plaintiffs were to sell the company at some later stage, the cost base of the shares would be reduced by the amount of compensation received (see s160ZH(i)).
The Tax Office ruling notes that Provan is an example of the plaintiff receiving additional consideration in respect of the disposal of an asset. The damages amount was calculated by reference to the amount that would have been received if the property had been sold at auction. Any extra money awarded for the payment of CGT effectively represented an additional consideration received by the owner in respect of the disposal of the property.
In Tuite, the plaintiffs were awarded an additional amount to cover the estimated taxation liability. In Provan, the plaintiff was given an indemnity for any taxation liability. In Carborundum Realty Pty Ltd v RAIA Archicentre Pty Ltd' Harper J refused to grant leave to amend the application for damages to include a further amount to cover the CGT liability.
In Namol Pty Ltd v AEW Baulderstone Pty Ltd & Ors (No 2),6 Davies J of the Federal Court ordered judgment for the first applicant against the second and third applicants in the sum of $657,238.
Counsel for the plaintiff further submitted that liability to CGT should be taken into account when awarding dam-ages. He submitted that the rate of CGT would be 33 percent (at that time the ordinary rate of company tax). He further submitted that once overall damages were subject to CGT, then CGT would be payable not only on the original amount of the award but also on the sum included to compensate the CGT (which accords with the recent Tax Office ruling). On that basis the addition for CGT should be 50 percent, not 33 percent. His Honour observed that:
He further did not accept the submission of counsel for the plaintiff that the amount of judgment for compensation for loss resulting from the wrong or default of another or the amounts paid pursuant to such judgments are chargeable to CGT. In his opinion, the legislation (i.e. the ITAA) is "concerned in imposing tax on gains arising from the holding or the use or exploitation of assets under sl6OM(6) from the creation of an asset which was vested in another person". He believed it to be "foreign to the context and purpose of the capital gains provisions to regard them as applying to the ordinary circumstance of compensation for loss brought about by the act or default of another person".
The CGT provisions have had unforeseen consequences and there may be circumstances where tax is payable on a payment of what appears to be compensation, but on the whole I believe that what His Honour stated is correct: where the payment is no more than a form of compensation for a loss suffered, CGT will not be payable because the cost base of the asset will be calculated to include that loss. Where the tax is payable it is because a gain in capital has occurred.
His Honour agreed with the "general thrust" of the remarks of Harper J in Carborundum.
The Tax Office in para 253 of its ruling stated that if "an additional amount of compensation is awarded to the taxpayer to cover the additional CGT liability which might arise in respect of the total compensation award, the additional amount of compensation is considered to represent additional consideration received by the taxpayer for the disposal of the underlying asset, the right to seek compensation or the notional asset, as the case may be".
On this basis, even if an amount were allowed for the taxation of the capital gains as sought by counsel in Namol, further taxation on that amount would also be payable.
I can see no reason for a different result if an indemnity is ordered rather than an amount of money. An indemnity "is a promise by the promisor that he will keep the promisee harmless against loss as a result of entering into a transaction with a third party".'
In Provan, Rolfe J granted an indemnity for the plaintiff for any CGT liability that might arise from the judgment. In Tuite, His Honour awarded an additional amount to cover the estimated taxation liability and granted an indemnity to the defend-ants in respect of any excess.
Section 160ZD(1) states that the consideration in respect of a disposal of an asset " ... (b) if the taxpayer has received or is entitled to receive property other than money as a result of or in respect of the disposal [is] the market value of that property at the time of disposal ...
The word "property" is not defined for the purposes of Part IIIA of the ITAA although the idea of a "proprietary right" is discussed. The case of Loxton v Moir' stated that "a contractual promise, an indemnity, is a chose-in-action and assign-able at law and in equity ... ". The Tax Office believes that an indemnity is a form of property for the purposes of sub-sec 160ZD(1) (see paras 254 to 258 of its ruling). In addition, it regards an indemnity as an "asset" for the purposes of sl6OA which therefore falls under the general provisions of Part IIIA. Its cost base is determined in accordance with sub-sec 160(M)(6B) and it is disposed of in terms of paragraph 160M(3)(b) where it is satisfied or surrendered in return for the receipt of money payable. Consequently, a capital gain or loss may arise on the disposal of the indemnity. If that amount were indemnified (as was the case in Namol) then the second amount of indemnity would also attract CGT, making the process a reducing one.
For instance, assuming a tax rate of 50 percent, if a party receives an amount of $100,000 which attracts CGT of $50,000 and an indemnity of $50,000 has been given, then CGT would be $75,000 (including $25,000 for CGT on the indemnity). If an indemnity were given for that further $25,000, then CGT of $12,500 would be payable on that amount. This process would continue until no tax is left to be paid.
Therefore the Court's attitude to whether further amounts should be awarded to the successful party to compensate for CGT is unclear, but it would perhaps be wise to advise your client of the words of Davies J: that is, in general, where awards of dam-ages are merely compensation for loss, CGT will not be attracted. However, if an award "reflects compensation for a gain that would have been made but for a wrongful act or default, then there is no reason in principle to regard the sum awarded or the payment thereof as having other than the same character as the gain would have had". (See Namol.) This includes property purchased pre-1985.
Davies J noted an award for $150,000 had been made for aggravated assault. His Honour said that "the award is not an award of compensation but is imposed to reflect the Court's view of the seriousness of the respondent's conduct. The sum is imposed because of the respondent's conduct, not because of loss suffered by Namol. If the tax loss required a payment of CGT on that sum then that is simply what the laws of the land provide." (my emphasis)
The sum of money awarded in a judgment or paid by way of settlement may consist (if broken down) of various amounts under various heads of damage. Section 16OZD(4) states: "where any consideration paid or given in respect of a transaction relates in part only to the disposal of a particular asset, so much of that consideration made that can reasonably be attributed to the disposal of the asset shall be taken to relate to the disposal of the asset". It is clear that this sub-section re-quires the taxpayer to allocate the amount received between the relevant heads of damage or assets. The Tax Office has stated "if the taxpayer allocates amounts between different assets on a reasonable basis we will generally accept that basis of allocation" (para 85 of the ruling).
In Federal Commissioner of Taxation v Slaven,° the Court held that whether a receipt constitutes income or capital in the hands of the taxpayer depends on the circumstances of the receipt and the reasons why it was paid to the taxpayer. The Tax Office believes that facts and circumstances surrounding the receipt may enable an apportionment of the lump sum payment on a reasonable basis into its constituting elements. The Tax Office noted the case of McLaurin v FC of T'° where the taxpayer had commenced an action to recover damages caused by fire originating on the defendant's land. The taxpayer had supplied the defendant with a list setting out particulars of damage. On the basis of its own list of particulars of damage the defendant offered the taxpayer a lesser sum amount as a lump sum in full settlement of his claim and the taxpayer
accepted the sum without knowing the basis of calculation of the sum.
The commissioner sought to assess the taxpayer on that portion of the lump sum which was of an income nature as based on the defendant's list of particulars.
The Court held that no apportionment was appropriate if the receipt was in respect of a claim or claims for unliquidated damages only and was made or accepted under a compromise which treated it as a single undissected amount of damages. However, the Court also held that a single receipt of a mixed nature may be apportioned across the several heads to which it related and an "income" or "non income" nature may be attributed to those heads of claim. The apportionment may be made if the amount was in "settlement of distinct claims in which some at least are liquidated" or otherwise as ascertained by calculation.
Clearly, where the sum ordered to be paid is undissected, the particulars of a claim may help to determine whether some other claim is satisfied by payment of compensation of a liquidated amount and whether individual claims can be identified, but where the lump sum is paid by way of settlement or under an insurance policy, settlement documents and the terms of the policies are evidence of the matters above. There may be other relevant evidence to determine the real agreement. The burden of proving all of this rests on the taxpayer. It is in the interest of the claimant or of the parties to ensure that claims are properly worded so that there is enough evidence to allow apportionment by the Tax Office even if the parties in the agreement are not willing or able to apportion any payment as part of the settlement. The Tax Office has stated that "if the taxpayer cannot or does not make a reasonable estimate, valuation or calculation of the amounts which are reasonably attributable to each claim, we will make that allocation using the information which is available in relation to those claims" (see para 203).
The Tax Office goes on to state that if compensation is unable to be allocated on a reasonable basis because of lack of in-formation, it will consider that the whole amount of compensation must relate to the disposal of the right to seek compensation and consequently may be fully taxable as a capital gain.
Example 5
Alison, while on holidays at a beach resort in December 1992, was photo-graphed in a compromising situation. The photographs were published in January 1993. Her four year contract as a child
ren's television personality was due for renewal in February 1993. However, the contract was not renewed and the television show was cancelled. Alison also owned the production company which produced the television show. Alison sued the photographer and the magazine for professional embarrassment and humiliation, breach of privacy, loss of income, and reduction in the value of her shares in the production company. In so doing, she incurred legal costs of $30,000. The court awarded her $500,000 as an undissected lump sum compensation payment in full settlement of all of her claims. Alison is not able to make any reasonable apportionment against the separate heads of claim.
Relevant asset: the right to seek compensation.
Acquired: at the time of publication of the photographs.
Cost base: legal fees of $30,000 incurred in making the claim.
Disposed of: on judgment.
Consideration: $500,000.
CGT consequences: as the amount awarded was undissected, no part can be said to relate to any personal injury suffered by Alison. Accordingly, the whole amount represents consideration for the disposal of the right to seek compensation. Therefore no part of the $470,000 will be exempt in terms of s16OZB(1).
If the amounts had been dissected by the court, or if Alison were able to provide a reasonable apportionment between the heads of claim, the compensation for professional embarrassment and humiliation and breach of privacy would be exempt by virtue of s16OZB(1).
This is potentially a very dangerous and expensive outcome as it could cost litigants large sums of money even though they have been successful in the action taken.
Obviously, if a claim related solely to personal injury or defamation then no CGT would be payable because of the exemptions allowed under s16OZB(1). This sub-section also extends to cover compensation received by the taxpayer for illness, not merely injury. (Note that since the recent decision of Whitaker v Commissioner of Taxation" income tax is apparently now assessable on interest allowed on a damages claim for the period between the date when the cause of action arose and the date when the judgment takes effect. Prior to this case, the commissioner had not made such a claim.) However, for other claims where CGT may be assessable, the greater the under
standing of the breakdown prior to payment the less likelihood of the Tax Office assessing the whole amount as taxable.
CONCLUSION
In essence, the laws relating to CGT as
they affect judgments and settlement
amounts should be applied with common
sense. It appears from this ruling that:
If a taxpayer is compensated for disposal of an asset or part of an asset, the compensation represents consideration received on the disposal of that asset.
Compensation received in respect of permanent damage suffered to an asset acquired after 20 September 1985 or for permanent reduction in the value of that asset is not deemed to be disposal of the asset, but rather is regarded as representing recoupment of all or part of the acquisition costs of the asset. CGT will therefore be payable at the time of sale of the asset in the future.
If compensation is received which does not relate to an asset, it relates to the disposal by the taxpayer of the right to seek compensation.
If the taxpayer is compensated for having paid excessive consideration to acquire an asset, the amount referrable to the overpayment represents a recovery of all or part of the total acquisition costs of that asset; this may impact on any CGT payable on disposal at a later date.
Compensation received by an individual for any wrong or injury suffered to his or her person or in his or her profession or vocation is exempt from CGT, but some aspect of interest awarded may be assessable for the purposes of income tax.
If compensation is received as a lump sum under a number of heads, including a personal injury claim, and the individual heads cannot reasonably be estimated, then the whole sum may be fully taxed as a capital gain.
The Court's attitude towards extra compensation for CGT is unclear, but the Tax Office will further tax such amounts if paid as a capital gain.
Notes
The author wishes to thank Rachel Foley-Lewis and Geoff Cohen for their useful comments on an earlier version of this paper. Further recommended reading: AH Slater SC and 1W Durack QC, Taxation of Judgments Awards and Settlements, CLE seminar, NSW Bar Association, 9 October 1995. 1. (1994) 119 ALR 629.2. [1948] 2 KB 474. 3. 92 ATC 4644. 4. 93 ATC 4293. 5. 93 ATC 4418. 6. [1993] FCA 606; (1993) 119 ALR 187. 7. See Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 254.8. [1984] FCA 23; (1914) 18 CLR 360.9. 84 ATC 4077. 10. [1961] HCA 9; (1961) 104 CLR 381. 11. CLS 1996 Fed 450.
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/journals/LawIJV/1997/14.html