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This edited version has been archived due to the length of time since original publication.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.

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Edited version of your written advice

Authorisation Number: 1051352693174

Date of advice: 12 April 2018

Ruling

Subject: Compensation payment

Question

Would the compensation payment for a loss of return on investments be treated as assessable income?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2018

The scheme commenced on:

01 July 2017

Relevant facts and circumstances

You took part in the program conducted by an entity

The complaint lodged with the review was in regard to the advice provided by the entities’ Financial Planner in 20XX

The review assessed your complaint and found that there was no evidence of inappropriateness in the advice you may have received

You dealt with the entity through various channels and eventually lodged a complaint with the Financial Ombudsman Service (FOS) in 20XX

The basis of the complaint with FOS was the advice being misleading and incorrect and you are seeking compensation for a shortfall in the return on investment

In 20XX you received an offer from the entity which was to compensate you for the loss of return on your investment and to resolve the Financial Planning complaint and FOS Dispute which you have not yet accepted

Relevant legislative provisions:

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1936 Subsection 25(1)

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

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:

Although the lump sum payment that you may receive will not be earned as it does not relate to services performed, it is not necessary for all of these characteristics to be present for the amount to be considered ordinary income.

An amount paid to compensate for loss generally acquires the same nature of what it is substituting (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82).

Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

As such, the compensation payment for a loss of return would be assessable income under subsection 6-5(2) of the ITAA 1997.

In addition, Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? states that if a payment is compensation for loss of income only, including interest, then it is assessable income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA).

Accordingly, the proposed compensation payment would also be assessable under section 25(1) of the Income Tax Assessment Act 1936 (ITAA).

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