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Edited version of private advice
Authorisation Number: 1052241629578
Date of advice: 12 April 2024
Ruling
Subject: Compensation
Question 1
Will Person A and Person B be assessed on the interests amounts they received?
Answer
Yes. The interest component of the compensation payments are assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).
Question 2
Will Person A and Person B be assessed on the compensation amounts they received?
Answer
No.
Question
Will Person A be assessed on additional compensation they received for services that may have not been delivered?
Answer
Person A will be assessed on the interest amount. They will not be assessed on the refunded advisor fees.
This ruling applies for the following period:
1 July 2023 - 30 June 2024
The scheme commenced on:
21 December 2023
Relevant facts and circumstances
Taxpayer A and Taxpayer B are a married couple.
Between DD MM XXX and DD MM XXXX, they each received financial advice in relation to their respective superannuation funds.
On DD MM XXX, Person A and Person B each received a letter from their advisor stating that a review had found that they had been given inappropriate financial advice.
As a result, they each received compensation on DD MM XXXX.
On DD MM XXXX, Person A received a further letter from their advisor stating that he had been provided inappropriate financial advice by a different individual for the period from MM XXXX to MM XXXX.
As a result, Person A received additional compensation on DD MM XXXX.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 118-305
Reasons for decision
Question 1
Will Person A and Person B be assessed on the interest amounts they received?
Summary
Yes. The interest component of your compensation payments are assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).
Detailed reasoning
Section 6-5 of the ITAA 1997 states that your assessable income includes income according to ordinary concepts. This 'ordinary income' includes amongst other things, income from salary, wages and interest.
Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts deals with the tax treatment of compensation receipts. Paragraph 26 of this ruling states that '[i]nterest awarded as part of a compensation amount is assessable income of the taxpayer under the general income provisions'.
In your case, you both received a Settlement Sum in relation to inappropriate financial advice. The Settlement Sums were not undissected lump sums as you were provided with a breakdown showing the components of the compensation payment and how this was calculated. The Interest Compensation amounts were separately identified as being interest. Therefore, the Interest Compensation amounts are assessable as ordinary income.
Question 2
Will Person A and Person B be assessed on the compensation amounts they received?
Summary
No.
Detailed reasoning
The compensation amounts do not have the characteristics of ordinary income under section 6-5 of the ITAA 1997, such as being relied upon, regular or repeated payments. They were not a payment for services performed, or for any investment. Rather, they are capital in nature and are subject to the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997.
Section 118-305 of the ITAA 1997 provides an exemption 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 payments you both received were in relation to such a right, being a right to provide you with the present value of the superannuation entitlement that you lost as a result of the actions of the advisor. Therefore, you can disregard any capital gain or loss made in relation to receiving the compensation payments.
Question 3
Will Person A be assessed on the additional compensation he received for services that may not have been delivered?
Summary
Person A will be assessed on the interest amount. They will not be assessed on the refunded advisor fees.
Detailed reasoning
As outlined in Question 1, interest on compensation amounts are assessable as ordinary income. Consequently, Person A will be assessed on the interest amount they received.
As Person A did not claim a deduction when he initially paid the advisor fees, the reimbursement for these fees does not form part of his assessable income.
For more information, please see the ATO webpage Compensation paid from financial institutions. Alternatively, go to ato.gov.au and search for 'QC 72107'.
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