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07 Apr 14 Amount refunded was not "by way of insurance or indemnity" - Batchelor

The Full Federal Court (Edmonds, Pagone and Wigney JJ) has held an amount received by the taxpayer as a refund of her deposit in a failed retirement village development was not assessable under s 20-20 ITAA 1997 as an assessable recoupment received "by way of insurance or indemnity". Accordingly, the Full Federal Court upheld the taxpayer's appeal and set aside the decision of Professor Deutsch DP in Batchelor and FCT [2013] AATA 93.

The matter was remitted to the AAT for further determination in relation to whether the refund was assessable as a capital gain.

One issue that arose in relation to the assessability of the payment under s 20-20 was the requirement that the amount received was an amount the taxpayer "(has) deducted or can deduct" in an earlier income year. In this regard, it appeared that the Commissioner had wrongly allowed the taxpayer a deduction, although this was not certain. Edmonds and Pagone JJ expressed the view that an amount wrongly deducted did not satisfy the requirement in s 20-20. Wigney J expressed a contrary view.

This issue also arose in relation to the question of whether the taxpayer had made a capital gain, as the question (as the AAT framed it) was whether the amount wrongly deducted reduced the taxpayer's cost base, thus giving rise to a capital gain. Edmonds and Pagone JJ said, at para 20:

"In the circumstances it is undesirable to say anything more about this issue except to repeat the doubt previously expressed about the correctness of the Commissioner’s submission that s 110-45(2)(a) excludes from the cost base amounts erroneously deducted. The refund of an amount previously paid is unlikely to produce a capital gain and the terms of s 110-45(2)(a) should not be misconstrued to correct an error of administration."

Batchelor v FCT [2014] FCAFC 41 (Full Federal Court; Edmonds, Pagone and Wigney JJ; 3 April 2014).


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