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Capital Gains Tax: Taxing the 'Right to Seek Compensation'


This paper analyses the anomaly under the Australian capital gains tax (CGT) provisions under which a tax liability can be imposed on the receipt of compensation when no real gain exists. Unless that receipt falls within the existing compensation exceptions, qualifies for rollover relief, or fits so squarely within Taxation Ruling TR 95/35 that its treatment cannot be challenged by the Commissioner, the taxation of the right to seek compensation reveals an inappropriate application of the law inconsistent with the underlying purpose of taxing only 'real capital gains'. In practice, this can be a real issue of concern for companies in liquidation that have been successful in receiving compensation for having suffered economic or financial loss as a result of various breaches of duties owed to them.

The purpose of this paper is to analyse this anomaly with a view to plotting a course for its practical and equitable resolution, and illustrating why, in the interests of fairness and certainty, there is need for legislative reform in this area. Finally, a number of new CGT events are proposed to rectify the situation.

Author profile

Brett Zimmermann CTA
Photo of author, Brett ZIMMERMANN Brett Zimmermann is a Senior Associate with DW Fox Tucker Lawyers and has practiced tax and commercial law for many years advising and assisting clients in many varied matters; the conduct and resolution of tax (& other) disputes, asset and business restructures, liquidations, trusts and equity law to mention the main. Brett lectures taxation law to both undergraduate and masters students at the University of Adelaide, and writes detailed commentary for leading legal commentary service Thomson Reuters, primarily in the area of capital gains tax and tax losses. Brett is also asked to present nationally and locally on capital gains tax, wine equalisation tax and SA’s landholder stamp duty provisions. - Current at 17 August 2016
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