Edited version of private advice

Authorisation number: 1052492682569

Date of advice: 19 January 2026

Ruling

Subject: Compensation - inappropriate financial advice

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.

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.

Question 3

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

Answer 3

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 financial advice from a financial adviser who previously worked at Group A between 20XX-20XX.

On Date one, you received a Statement of Advice. As a result of that statement, you rolled over your pension account A into a new pension account (Pension account B) on Date 2.

You then rolled over your Pension account B into a new pension account on Date 3. This rollover was in accordance with a subsequent Statement of Advice provided to you on Date 4.

Group A conducted an internal review of the advice provided to you. In that review, they found that the Statements of Advice dated Date one and Date 4 may not have been appropriate for your goals, needs and or personal circumstances at the time.

You were paid compensation with a proportion for investment loss and a proportion for interest.

The compensation amount was calculated by comparing the closing balance of the appropriate product or portfolio with the closing balance of the actual product.

The interest amount was calculated based on the foregone return you might have earned on 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 section 102-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-305

Reasons for decision

Question 1

Summary

The non-interest component of the compensation payment is not 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 provides that your assessable income includes income according to ordinary concepts, which is called ordinary income.

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.

Application to your circumstances

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 is 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

Summary

Any capital gain on the non-interest component of the compensation amount can be disregarded under section 118-305 of the ITAA 1997.

Detailed reasoning

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.

Application to your circumstances

In your case you acquired your CGT asset, being your right to seek compensation, due to the Adviser 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.

Question 3

Summary

The interest component of the compensation payment is assessable as ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

As outlined in Question 1, section 6-5 of the ITAA provides that your assessable income includes income according to ordinary concepts, which is called ordinary income.

Paragraph 26 of Taxation Ruling TR 95/35 ,Income tax: capital gains: treatment of compensation receipts confirms that interest awarded as part of a compensation amount is assessable income of the taxpayer under the general income provisions.

As outlined in paragraph 237 of TR 95/35,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.

Paragraph 246 of TR 95/35 provides that any 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, constitutes assessable income of the taxpayer under general income provisions.

Application to your circumstances

You received a compensation payment for inappropriate financial advice, with a separately identifiable interest component. This amount constitutes assessable income and is assessable as ordinary income under section 6-5 of the ITAA 1997.

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