Edited version of private advice

Authorisation Number: 1052255883928

Date of advice: 27 May 2024

Ruling

Subject: Compensation payments

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

Will any capital gain on the remainder of the compensation payment be disregarded under section 118-305 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You received a compensation payment from an entity in regard to a superannuation pension account you held with that entity.

An adviser of the entity recommended investment changes to your superannuation pension account you held with that entity on DD MM 20YY.

It was determined by the entity that whilst the investment changes aligned with your risk appetite at the time the advice was given, the subsequent allocation of assets were not in line with your risk tolerance.

The compensation payment had two components:

•         A compensation amount of $X.

•         Compensatory interest of $X.

You received a cheque of $X on DD MM 20YY.

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 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 of $X you received as part of the compensation payment is assessable as ordinary income and must be included in your income tax return for the income tax year ending 30 June 20YY.

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 of $X you received was in relation to such a right and therefore any capital gain or loss is disregarded. Consequently, no amount is required to be included in your income tax return in relation to the amount you received.

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