You may personally receive compensation from a financial institution because:
- the advice you receive from them was found to be inappropriate
- you pay them for advice that you didn't receive.
The income tax treatment of the compensation depends on what the compensation is being paid for and how you hold (or held) the investments.
Your compensation payment can include some or all of:
The compensation may relate to multiple investments, with different amounts of compensation granted against each one. You treat each compensation amount separately.
You may need to contact us for advice if:
- you held the investments on revenue account
- you held the investments on trust
- the compensation relates to a superannuation account or self-managed super fund.
You may receive compensation for a loss amount if the value of your investments is lower than it would have been if you had received appropriate advice.
The income tax treatment will depend on the status of your investment. Find out how to treat:
- compensation when you have disposed of the investment
- compensation in relation to existing investments.
When you dispose of the relevant investment, a capital gains tax (CGT) event happens. You report capital gains or losses you make from a CGT event in the income year you dispose of the asset.
Compensation payments you receive can be treated as additional capital proceeds relating to the disposal of those investments. If you had more than one investment, you will need to apportion the additional capital proceeds to each disposal.
If you are an Australian resident for tax purposes and the compensation relates to investments you held for at least 12 months, you may be able to claim the 50% CGT discount. This occurs where you disposed of your investments for a capital gain.
You may need to request an amendment to your tax return to reflect the additional capital proceeds if the compensation relates to CGT events that happened in a previous income year.
If you receive compensation for investments you still own, you need to reduce either the cost base or the reduced cost base. You reduce one of these amounts by the compensation amount you received. This depends on whether you make a capital loss or gain when you dispose of the investments.
You will need to apportion the compensation amount where it relates to more than one investment.
Your compensation payment may include an amount that is a refund or reimbursement of adviser fees. The income tax treatment of this amount depends on whether you claimed a deduction for the adviser fees in your tax return.
Deduction claimed for adviser fees
If you claimed a deduction for the adviser fees in a tax return, the amount you received as a refund or reimbursement will form part of your assessable income in the year you receive it.
Deduction not claimed for adviser fees
If you did not claim a deduction for the adviser fees, the refund or reimbursement does not form part of your assessable income.
However, where the adviser fees were included in the cost base or reduced cost base of any investments you made, you must reduce the cost base and reduced cost base by the amount of the refund or reimbursement.
You don't need to report any change of cost base and reduced cost base to us. The cost base and reduced cost base are used to calculate your capital gain or loss when you dispose of the investment. Report your capital gain or loss to us in the tax return for the year in which you dispose of the investment.
If you have disposed of these investments and have returned any resulting capital gain or loss in a previous income year, you may need to amend your tax return for that income year.
The interest component is assessable as ordinary income. You must include the interest component in your return in the income year you receive it.
Example: investments held individually
Noel paid $2,000 to a financial institution for investment advice in May 2011. Following that advice Noel invested $100,000 in a high risk-high growth investment fund. The investment fund performed poorly and Noel disposed of the investment for $70,000 in January 2016.
Noel had claimed a deduction for the advice in his 2010–11 tax return.
An A1 CGT event happened when Noel disposed of all the investments in his portfolio. As a result of that, Noel made a capital loss of $30,000 that he included in his 2015–16 tax return.
The financial institution reviewed the advice given to Noel and determined that the advice was inappropriate for his circumstances as he should have been advised to invest in a more conservative portfolio.
In 2022, the financial institution offered Noel compensation of $40,000 in respect of the advice. The payment included compensation of $30,000, a refund of the adviser fees of $2,000 and an interest component of $8,000. Noel accepted the offer of compensation in June 2022.
Noel treats the $30,000 compensation for loss amount as additional capital proceeds received for the investments. Noel recalculates his capital loss for 2015–16, reducing it to nil. Noel will need to amend his 2015–16 return with the new calculation.
As Noel had claimed a tax deduction for the adviser fees in his 2010–11 tax return, the $2,000 refund of those fees is included in his assessable income in his 2021–22 tax return. He will also include the $8,000 interest component in his 2021–22 tax return.End of example