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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051274864439

Date of advice: 29 August 2017

Ruling

Subject: Compensation - Investment

Question 1

Is the whole amount of compensation received tax exempt?

Answer

No

Question 2

Is the investment compensation and excess management fee compensation assessable as ordinary income?

Answer

No

Question 3

Is there any capital gains tax (CGT) consequences as a result of the investment compensation and excess management fee compensation?

Answer

No

Question 4

Is the investment interest compensation and the excess management fee interest compensation assessable as ordinary income?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commences on:

1 July 2016

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In late 200X you had recently retired and sought advice from Commonwealth Financial Planning (CFP) on low to medium risk options to invest your retirement funds, which would preserve your capital and provide reasonable income in your retirement.

You entered into an agreement with CFP on DDMMYY and rolled your super account and invested your cash holdings into an allocated pension with a relevant Fund. The fund was tax free investment as you were over 60 years of age.

You believed the advice provided by CFP did not meet the agreed investment expectations resulting in a substantial loss. As a result you closed the allocated pension account in early 201X and transferred funds to a bank term deposit account.

You sought compensation from the Bank (XYZ) for your losses through the Financial Ombudsman Service.

The XYZ offered you an ex-gratia payment in full and final resolution of the complaint.

You accepted the XYZ offer. The payment consisted of the following components:

Relevant legal provisions

Income Tax Assessment Act 1997 section 6-5.

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 118-305

Reasons for decision

Summary

The investment compensation and excess management fees compensation you received in respect of your complaint surrounding the loss incurred by your superannuation fund is not regarded as ordinary income. Additionally, as the compensation payments were made in respect of the permanent reduction in value of your right to a capital amount payable from your superannuation fund, any capital gain or loss made from the payment is disregarded.

The interest components of the compensation payments are regarded as ordinary income. Therefore, the interest payments you received as part of your compensation is assessable income in the year of receipt.

Detailed Reasoning

Ordinary Income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

Based on case law, it can be said that ordinary income generally includes receipts that:

Paragraph 26 of Taxation Ruling TR 95/35 deals with the treatment of interest awarded as a part of a compensation amount. It states:

In your case, you received compensation due to inappropriate financial advice. There are amounts separately identified as interest. These amounts are assessable as ordinary income in the year of receipt.

The investment compensation and excess management fee compensation payments that you received are in respect of a review conducted by XYZ because they had provided inappropriate advice which caused your allocated pension account not to perform as well as it should have. The payments were not earned by you as it does not relate to services performed. The payments were a one off payment and don’t not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation does not arise from a relationship to personal services performed.

Accordingly, the investment and excess management fee compensation payments are not ordinary income and are therefore not assessable under section 6-5 of the ITAA 1997.

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.

Capital gains

Taxation Ruling TR 95/35 considers the treatment of compensation payments and the capital gains tax (CGT) consequences for the recipient.

In your case, the underlying CGT asset is your right to a capital amount payable out of a superannuation fund in the form of your allocated pension. As a result of the actions of your financial advisor, there was a reduction in the value of your allocated pension account. Therefore, it is considered that there has been a permanent reduction in value of your right to a capital amount payable out of your superannuation fund.

Subsection 118-305(1) of the ITAA 1997 disregards any capital gain or loss if you make it from a CGT event in relation to any of the following;

The investment and excess management fee compensation you received was in relation to the permanent reduction in value of your right to a capital amount payable out of a superannuation fund. Therefore, any capital gain or loss you made is disregarded under section 118-305 of the ITAA 1997. These amounts are not assessable under any other provision.

ATO view documents

Taxation Ruling TR 95/35

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