Edited version of private advice

Authorisation Number: 1052239752757

Date of advice: 9 April 2024

Ruling

Subject: Compensation - inappropriate adviser fees

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

Answer

Yes.

Question 3

Will any capital gain on the remainder of the compensation payment be disregarded under section 118-305 of the Income Tax Assessment Act 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 received correspondence from an entity in regard to a superannuation pension account you held with the entity.

The correspondence stated that a review had found that certain advice you received from an adviser some years ago was assessed as not being appropriate for your personal circumstances. As a result, the entity paid you a total compensation amount of $X for inappropriate fees as follows:

•         a refund amount for an adviser service fee charged to your pension account

•         interest representing the foregone interest you could have earned on the refund amount.

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 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. Payments in the nature of interest are generally included in assessable income.

An award of compensation made to a taxpayer may include an amount of interest.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts (TR 95/35) states that it is a question of fact to be determined in each case whether any part of a compensation payment received by a taxpayer is in the nature interest.

TR 95/35 also includes the following guidance in relation to interest and compensation payments:

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, an amount which is in the nature of interest, and which can be identified as interest, and whether paid as part of the compensation or separately, is included in assessable income.

In your case, a component of the compensation you received was in the nature of interest and can be identified as interest.

Therefore, the interest component you received as part of the compensation payment is assessable as ordinary income and must be included in your income tax return for the relevant income tax year.

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.

Question 3

Will any capital gain on the remainder of the compensation payment be disregarded under section 118-305 of the 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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