Edited version of private advice

Authorisation Number: 1052260189139

Date of advice: 12 June 2024

Ruling

Subject: Superannuation compensation

Question 1

Is the interest component you received as part of the compensation assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the compensation amount, excluding the interest component, assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

No.

Question 3

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

Answer

Yes.

This ruling applies for the following period:

Year ending XX XX 20XX

The scheme commenced on:

XX XX 20XX

Relevant facts and circumstances

On XX XX 20XX you received a letter from entity A notifying you that you were owed a remediation amount as compensation in relation to advice provided regarding your entity B pension account for the period XX XX 20XX to XX XX 20XX.

The letter stated that advice provided to entity B may not have been appropriate for your goals, needs and personal circumstances at the time.

Consequently, a compensation amount and compensatory interest has been paid as compensation.

The entity B pension account has since been closed. Therefore, you received the compensation to your personal account.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 118-305

Reasons for decision

Question 1

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

Detailed Reasoning

Section 6-5 of the 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 (TR 95/35) 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 amount is assessable as ordinary income and will need to be included in your 20XX individual tax return.

Question 2

Is the compensation amount, excluding the interest component, assessable as ordinary income?

Detailed Reasoning

The compensation amount does not have the characteristics of ordinary income under section 6-5 of the ITAA 1997, such as being relied upon, regular or repeated payments, it was not a payment for any service you had performed, or for any investment. Rather it is capital in nature and potentially subject to the capital gains tax provisions.

Question 3

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

Detailed 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 amount you received was in relation to such a right and therefore any capital gain or loss is disregarded.

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