Edited version of private advice

Authorisation Number: 1052420327957

Date of advice: 10 July 2025

Ruling

Subject: Compensation - lump sum payment

Question 1:

Is the settlement amount classified as a superannuation benefit under section 307-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No.

Question 2:

Is the settlement amount assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer:

No.

Question 3:

Will any capital gain made in relation to the settlement amount be disregarded under section 118-305 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You were a member of a superannuation fund (the Fund).

The Fund benefit was reduced due to a family law superannuation split. However, after some years the trustee of the Fund upgraded their systems when the reduction of the Fund benefit was not recorded correctly. This resulted in you receiving annual member statements for several years containing inflated information about your Fund benefit entitlements.

You sought a benefit estimate in relation to your possible retirement, with you being provided with the inflated Fund benefit value.

Based on the Fund benefit value you were provided, you decided to retire from your employment and claim your benefit as a pension.

You received a pension amount at a higher rate than you were entitled to for some years until the trust's system's error was discovered and remedied, which resulted in your fortnightly pension being reduced.

The trustee notified you of the error during the following year when you were advised that the trustee would not be seeking to recover the overpaid pension amounts that you had received due to the error.

You made a legal claim against the trustee stating that you had suffered loss and sought compensation.

The trustee made you an offer because they had concluded that they were liable to compensate you for any financial detriment you suffered as a direct result of the incorrect information provided to you in relation to the value of your Fund benefit, which you had relied on to retire from your employment. A specified gross compensation amount (the settlement amount) was provided to fully resolve your complaint the settlement amount was calculated using the average life expectancy for a person of your sex born in the year of your birth, multiplied by the pension reduction amount.

You accepted the trustee's offer, with the settlement amount being paid into your nominated bank account.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-305

Income Tax Assessment Act 1997 section 307-5

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1: Is the settlement amount classified as a superannuation benefit under section 307-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Superannuation benefits

Subsection 995-1(1) of the ITAA 1997 defines 'superannuation benefit' as having the meaning given by section 307-5 of the ITAA 1997.

Subsection 307 5(1) of the ITAA 1997 defines the term superannuation benefit as being a payment described in the table appearing in the subsection. Item 1 of the table relevantly defines a 'superannuation fund payment' and states:

Subsection 307 5(2) of the ITAA 1997 further clarifies that a payment described in column 2 of the table in subsection 307 5(1) of the ITAA 1997 is a superannuation member benefit.

Application to your situation

You were in dispute with the trustee of the Fund, due to the detrimental advice received. To settle the dispute, the parties agreed to a compensation payment (without acceptance of liability) as per the terms of the Deed. The payment was made by the trustee of Fund in accordance with the terms of the Deed of Settlement to discharge any claims made against it by you, not because the Fund is a superannuation provider of the member.

As this payment was not made from the Fund, but rather by the trustee of the Fund, the payment is not a superannuation benefit in accordance with section 307-5 of the ITAA 1997. This is because the payment received by you is not a category of superannuation payment mentioned in subsection 307-5(1) of the ITAA 1997.

Question 2: Is the settlement amount assessable as ordinary income under section 6-5 of the ITAA 1997?

Detailed reasoning

Ordinary income

Section 6-5 of the ITAA 1997 does not provide specific guidance on the meaning of income according to ordinary concepts (ordinary income). However likely characteristics of ordinary income that have evolved from case law include receipts that

•         are periodical, regular or recurrent

•         are relied upon by the recipient for their regular expenditure and paid to them for that purpose; and

•         are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient.

Application to your situation

In your case, the settlement amount was calculated using the average life expectancy for a person of your sex born in the year of your birth, multiplied by the pension reduction amount.

It was a one-off receipt that does not display the characteristics of being ordinary income as outlined above.

Therefore, the settlement amount is not assessable as ordinary income under section 6-5 of the ITAA 1997. However, the settlement amount is considered to be capital in nature.

Question 3: Will any capital gain made in relation to the settlement amount be disregarded under section 118 305 of the ITAA 1997?

Detailed reasoning

Capital gains tax

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997.

A taxpayer's right to seek compensation is an intangible capital gains tax (CGT) asset under paragraph 108-5(1)(b) of the ITAA 1997. CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including being released or cancelled under subsection 104-25(1) of the ITAA 1997.

Superannuation CGT exemption

An exemption is provided under section 118-305 of the ITAA 1997 for any capital gain or loss made from a CGT event happening in relation to a right to an allowance, annuity or capital amount payable out of a superannuation fund or an asset of a superannuation fund.

Application to your situation

In your case you acquired your CGT asset, being your right to seek compensation, due to the error made in relation to your Fund pension. Your ownership of that CGT asset ended when you accepted the offer made to you by the trustee to settle your claim and CGT event C2 occurred. Your capital proceeds for the CGT event C2 occurring are the settlement amount.

It is viewed that the settlement amount was paid to you in relation to right that meets the conditions contained in section 118-305 of the ITAA 1997.

Therefore, any capital gain or loss made as a result of the CGT event C2 occurring is disregarded.