Edited version of private advice

Authorisation Number: 1052390495457

Date of advice: 05 May 2025

Ruling

Subject: Compensation payment - lump sum

Question 1:

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

Answer 1:

No.

Section 6-5 of the ITAA 1997 does not provide specific guidance on the meaning of income according to ordinary concepts (ordinary income). However likely characteristics of ordinary income that have evolved from case law include receipts that

•                     are periodical, regular or recurrent

•                     are relied upon by the recipient for their regular expenditure and paid to them for that purpose; and

•                     are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient.

In your case, the non-interest component of the compensation payment was calculated based on the difference between comparing the closing balance of the appropriate product/portfolio to the closing balance of the actual product. It was a one-off receipt that does not display the characteristics of being ordinary income as outlined above.

Therefore, the non-interest component of the compensation payment not assessable as ordinary income under section 6-5 of the ITAA 1997. However, the amount is considered to be capital in nature.

Question 2:

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

Answer 2:

Yes.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997.

A taxpayer's right to seek compensation is an intangible capital gains tax (CGT) asset under paragraph 108-5(1)(b) of the ITAA 1997. CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including being released or cancelled under subsection 104-25(1) of the ITAA 1997.

In your case you acquired your CGT asset, being your right to seek compensation, due to the Advisor providing you with incorrect advice. Your ownership of that CGT asset ended when you accepted the compensation payment to settle your claim and CGT event C2 occurred. Your capital proceeds for the CGT event C2 occurring are the non-interest component of the compensation payment.

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.

It is considered that the non-interest component of the compensation payment you received was in relation to such a right and therefore any capital gain or loss is disregarded.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are retired.

You held superannuation funds with Company ABC which included pension and superannuation accounts. You no longer hold the pension accounts.

You received a letter from Company X in relation to a review of financial advice you had received during a specified period (Relevant Period) by their adviser (Adviser) while they were authorised with Company X.

Company X issued a letter to you which outlined that:

•                     their review had found that advice you received from the Adviser during the Relevant Period may not have been appropriate for your goals, needs and/or personal circumstances at the time.

•                     recommendations were made by the Advisor included the setting up of several new pension accounts; and

•                     as a result of the review, you were offered a specified amount of compensation in relation to your super and pension accounts that consisted of a specified interest component amount, and a specified non-interest component amount. The non-interest compensation amount had been calculated as being the difference between comparing the closing balance of the appropriate product/portfolio to the closing balance of the actual product.

You accepted the offer of the compensation payment and received a cheque for the compensation amount.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 104-25(1)

Income Tax Assessment Act 1997 paragraph 108-5(1)(b)

Income Tax Assessment Act 1997 section 118-305

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