Edited version of your written advice

Authorisation Number: 1051244877808

Date of advice: 30 June 2017

Ruling

Subject: Income - compensation

Question 1

Is the interest received assessable as ordinary income?

Answer

Yes.

Question 2

Are the amounts received as a refund, which represent your income protection insurance cover, assessable income?

Answer

Yes.

Question 3

Are the amounts received as a refund, which represent your Total & permanent disability insurance cover, assessable income?

Answer

No.

Question 4

Is the amount received which represents the underperformance of your investments assessable under the Capital Gains tax provisions?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You engaged a financial planner to provide you with financial advice.

They wrote to you in XXXX 20XX detailing and explaining you would receive a calculation outlining the performance of your portfolio.

Upon review of your portfolio it was noted that for the period of XXXX 20XX to XXXX 20XX, your portfolio was not managed correctly and as a consequence had underperformed.

It was determined you were entitled to compensation. They provided the compensation calculation to you for your review and to decide whether you accept the proposal for compensation.

At no point did you file a claim or seek any damages in regards to your situation, you were simply contacted and told that you were to receive the compensation into your nominated bank account after signing the relevant documentation.

By signing the Deed of release and payment form you release the bank and its agents from any future claims to seek compensation.

You have not claimed a deduction for your insurance fees relating to your Total & permanent disability cover, however you have claimed a deduction for your insurance fees relating to your income protection cover.

You have claimed a deduction for the interest expenses associated with your portfolio.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

Detailed reasoning

Ordinary Income

Your assessable income includes income according to ordinary concepts, which is called ordinary income (section 6-5 of the Income Tax Assessment Act 1997).

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

● are earned

● are expected

● are relied upon, and

● have an element of periodicity, recurrence or regularity.

Interest received

Interest income is regarded as ordinary income and therefore assessable under subsection 6-5(2) of the ITAA 1997.

Compensation payments which substitute income are regarded as ordinary income.

Therefore the compensation for lost interest is regarded as ordinary assessable income.

Refund of insurance premiums

Income protection

Recoupment

Subsection 20-20(2) of the ITAA 1997 provides that an amount you have received as a recoupment of a loss of outgoing is an assessable recoupment if:

● you received the amount by way of insurance or indemnity, and

● you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it in an earlier income year, under any provision of this Act.

Total & permanent disability

This refund does not represent the characteristics of ordinary income, therefore is not assessable under section 6-5 of the ITAA 1997.

They are also not assessable under any other provision of the ITAA 1997.

Capital gains

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 and are also included as assessable income.

Amounts received as a lump sum are generally capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.

Part 3-1 of the ITAA 1997 contains the capital gains and capital loss provisions commonly referred to as the CGT provisions. You make a capital gain or capital loss if a CGT event happens in respect of a CGT asset.

A CGT asset is defined in paragraph 108-5(1)(b) of the ITAA 1997 as including a legal or equitable right that is not property.

Section 104-25 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being released, discharged or surrendered.

Taxation Ruling 95/35 Income tax: capital gains: treatment of compensation receipts considers the CGT consequences for compensation.

You are considering entering into an agreement to accept a lump sum payment for agreeing not to seek further compensation, and surrender your legal right. Thus, your legal right to seek compensation will end. It is considered the lump sum amount you will receive is a payment for the ending of this right. Therefore, CGT event C2 will happen and a capital gain may arise.

If the capital proceeds from the CGT event (that is, the lump sum payment) is more than the costs associated with that event, you will make a capital gain and this included in your assessable income.

50% general CGT discount

Section 115-25 of the ITAA 1997 generally allows any individual to apply a 50% discount to any capital gain provided that the CGT event to which the capital gain relates occurs at least 12 months after the asset is acquired.

You acquired the right to seek compensation when the incorrect financial advice was provided to you. You will dispose of this right when you enter into the Deed of Settlement and Release.

As your right to seek compensation was acquired more than 12 months before the disposal will occur, you can apply the 50% general discount to the capital gain you made from CGT event C2 happening.

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