In the 2012-13 Federal Budget, the government announced that it would make additions to the capital gains tax (CGT) exemptions for certain compensation payments and insurance policies, with effect from the 2005-06 year.
The measure announced was to the effect that CGT consequences would be disregarded where a taxpayer receives compensation, damages or certain insurance proceeds indirectly through a trust. This change was so as to ensure that the taxpayer receiving such amounts via a trust had the same CGT outcome as a taxpayer that received such proceeds directly.
In December 2013, in an announcement concerning a backlog of announced but unlegislated tax and superannuation measures, the Assistant Treasurer confirmed that the Budget announcement would proceed. On 23 September 2014 the Treasury released Exposure Draft legislation and a draft Explanatory Memorandum to give effect to the announced amendments to the CGT provisions of the Income Tax Assessment Act 1997.
The Explanatory Memorandum indicates that, while it may have been intended that trustees or beneficiaries receiving compensation or damages in respect of certain events (such an injury suffered at work) or in respect of certain policies of insurance (such as illness, injury or death) not be subject to CGT, the wording of the existing CGT provisions created some uncertainty in this regard.
Accordingly, the Exposure Draft legislation seeks to ensure that the following gains or losses are disregarded for CGT purposes:
- those made by a trustee in relation to compensation or damages for any wrong or injury a beneficiary of the trust suffers in their occupation, or any wrong, injury or illness a beneficiary of the trust suffers personally
- those made by a beneficiary to the extent that the trustee distributes a CGT asset to the beneficiary that is attributable to compensation or damages received by the trustee in respect of wrongs, injuries or illnesses referred to in the previous point
- those made by the trustee/original owner in respect of an interest in a policy of insurance on the life of an individual or an annuity instrument, and also the subsequent payment to a beneficiary in respect of the policy or instrument
- those made by the trustee of a complying superannuation entity in relation to an interest in a policy of insurance for an individual’s injury or illness (such as total and permanent disability, trauma and income protection insurance).
The amendments are a welcome clarification of the CGT exemption for compensation, damages and insurance proceeds passing through trusts and are proposed to apply for the 2005-06 and later income years.
The closing date for submissions on the Exposure Draft legislation was 21 October 2014.