Edited version of private advice

Authorisation Number: 1051994221103

Date of advice: 23 June 2022

Ruling

Subject: Compensation

Question 1

Is the interest component you received as part of the compensation payment assessable as ordinary income?

Answer

Yes.

Question 2

Is the remainder of the compensation payment you received subject to the capital gains tax provisions?

Answer

Yes.

Question 3

If the answer to Question 2 is Yes, will any capital gain on the remainder of the compensation payment be disregarded under section 118-305 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were an Australian resident for tax purposes during the entire period of the relevant events.

You received an offer from a financial institution to pay compensation for inappropriate advice you received in relation to superannuation products.

You accepted the compensation in the 20XX-XX income year.

The total compensation amount you received was $X of which the financial institution advised $Y was for interest.

The compensation, apart from the interest component and an amount for the refund of overcharged fees, was calculated based on the difference between the actual fund balances of your superannuation products at the end of the compensation period and what the balances would have been at that time if you had received appropriate advice.

You did not claim deductions in your income tax returns for the fees in relation to your superannuation products.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 118-305

Reasons for decision

Question 1

Is the interest component you received as part of the compensation payment assessable as ordinary income?

Reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts, which is called ordinary income.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts considered an argument raised that interest in relation to compensation is not interest that is ordinary income; rather the claim is that the interest represents a capital amount which is simply part of the compensation, and which effectively represents part of the consideration received on the disposal of either the underlying asset or the right to seek compensation, as the case may be.

However, TR 95/35 did not accept this view. It states:

237. Interest has been described as 'payment by time for the use of money' (Rowlatt J in Bennett v. Ogston (1930) 15 TC 374 at 379). In economic terms, interest is the return or compensation for the use or retention by one person of a sum of money belonging or owed to another. Court rules allow the Court to include in compensation interest on the whole or part of the amount for the whole or part of the period to which the judgment relates.

238. Any interest awarded as part of compensation is interest within the general meaning of that term. It represents assessable income of the taxpayer even when the judgment provides only for a single lump sum which would otherwise be a capital receipt (Federal Wharf Co Ltd v. DFC of T (1930) 44 CLR 24; 1 ATD 70 and Riches v. Westminster Bank Ltd [1947] AC 390).

Consequently, the interest component you received as part of the compensation payment is assessable as ordinary income.

Question 2

Is the remainder of the compensation payment you received subject to the capital gains tax provisions?

Reasoning

The remainder of the compensation payment you received does not have the characteristics of ordinary income. Rather it is capital in nature and consequently subject to the capital gains tax provisions. Also, the portion that was a refund of fees is not an assessable recoupment under section 20-20 of the ITAA 1997 as fees in relation to a superannuation product are not deductible to an individual and you did not claim deductions for them.

Question 3

If the answer to Question 2 is Yes, will any capital gain on the remainder of the compensation payment be disregarded under section 118-305 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Reasoning

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. In your case, it is considered that the compensation you received was in relation to such a right and therefore any capital gain or loss is disregarded.

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