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Ruling

Subject: Settlement of claim in respect of compensation for financial loss

Questions

1. Is the amount paid by the Trustee of the superannuation fund (the Fund) as settlement lump sum for your claim in respect of compensation for financial loss taxable as a lump sum superannuation payment?

2. Is the amount offered by the Trustee of the Fund as settlement for your claim in respect of compensation for financial loss taxable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

3. Is the amount offered by Trustee of the Fund as settlement for your claim in respect of compensation for financial loss assessable as a capital gain?

Answers

1. Yes.

2. No.

3. No.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are under 65 years of age.

You are currently a member of a superannuation fund (the Fund) and details of your memberships are as follows.

· full time employee for a number of years several years ago.

· a second membership during the 2002-03 income year.

· full time employee, during the 2005-06 income year.

In respect of your second membership for the period a particular number was applied to you under the Fund Rules on again becoming a Fund member several years ago.

Following the cessation of your second membership several years ago, you received a letter from the Fund during the 2002-03 income year identifying an equity on the cessation of your second membership of an amount. This calculation used a particular benefit of an amount.

During the 2006-07 income year, you elected to transfer the funded accumulation components of your equity in the Fund to the cash option.

The Fund advised you in letter during the 2010-11 income year that a decision was made during the 2010-11 income year to calculate the particular benefit in the way that was permitted under the Fund rules and also advised that if you felt that you have suffered financial loss as a result of the specific number of years of delay in making the decision and you would like to request compensation for that financial loss

By email during the 2010-11 income year you sought reconsideration of the delegate's decision made during the 2010-11 income year.

On reviewing the decision made during the 2010-11 income year, the Trustee of the Fund during the 2011-12 income year made a decision to substitute the decision of the delegate made during the 2010-11 income year under a specific Rule, to use a later date than the date on which the taxpayer last became a full time member to calculate a particular number..

The effect of the decision made during the 2010-11 income year was to reduce the value of your equity in the Fund from that which had been advised to you at the cessation of your second Fund membership several years ago.

The particular number was reduced as a result of the decision. The number that now applied several years ago was a number with the result that your particular benefit as at the cessation of your second membership several years ago was a certain amount.

The Trustee in its statement of reasons noted that in the years since the 2002-03 income year you have continued to receive annual member statements with a certain calculation (based on the particular calculation for your second membership).,

Consistent with this, the benefit estimate provided to you by the Fund during the 2006-07 income year (for the 2005-06 income year following the cessation of your third membership) stated that your equity balance several years ago had been a particular amount.

You explained that as a result of the advice from the Fund (above) as to the value of your particular benefit at that time (and endorsed in benefit estimate and annual member statements in the years following) you had felt able to adopt a more conservative and less risk-oriented investment strategy for your Fund equity while still being able to achieve your investment goals for that fund.

You ceased your third Fund membership during the 2005-06 income year and again became a particular member; and at this time you returned to the default option.

During the 2006-07 income year you again moved your equity into the cash option.

As part of the review you sought (during the 2010-11 income year) by email of the delegate's decision during the 2010-11 income year by the Trustee of the Fund, you set out an alternative claim for compensation for financial loss resulting from the relevant decision during the 2010-11 income year.

You restated a claim for compensation during the 2011-12 income year following the decision of the Trustee of the Fund on the review of the delegate's decision during the 2010-11 income year (your Application for Reconsideration of Decision).

You stated the financial loss you have suffered is the difference between the value of the funded accumulation components of your equity resulting from your having that equity while a particular t member in the lower performing cash option several years ago until you became a full time member again during the 2005-06 income year and what its value would be now if you had held that equity in the better performing default option during that period (or alternatively you seek direct monetary compensation to that effect).

The nature of the compensation claim was essentially that you had been receiving representations several years ago that your equity in the Fund was greater than it now was as a result of the decision.

That had you known several years ago that your equity in the Fund was less than you had been advised, you would have invested your equity in the default option rather than in the cash option several years ago until you again became a particular member of the Fund during the 2005-06 income year.

In identifying your financial loss, you state it was difficult for you to identify this loss after a delay of several years. However you state it is reasonable to assume that you have made financial decisions during this period on the basis of the Fund not having made this decision several years ago.

You also submitted that your fund equity in the Fund should be credited with the difference between the value of the funded accumulation components of your equity resulting from your having that equity while a particular member in the lower performing cash option several years ago until you became a full time member again during the 2005-06 income year; and what its value would now be if you had held that equity in the better performing default option during that period [or alternatively you seek direct monetary compensation to like effect].

In the offer of settlement during the 2011-12 income year, the Trustee of the Fund considered the maximum potential value of the alleged lost opportunity as at a specific date during the 2010-11 income year of a gross amount and discounted this sum by a percentage for the risk that you would not be able to establish your claim, and therefore offered to settle the claim for an amount.

The Trustee of the Fund did not admit liability but offered the amount as a settlement sum for your compensation claim for financial loss.

The offer was conditional upon you entering into a deed of release in terms acceptable to the Trustee of the Fund and your employer.

The Trustee of the Fund also pointed to a possible review you could seek from a complaints tribunal.

You understand the settlement sum offered represents the compromise of your claim in respect of the reduced value of your funded accumulation components in the Fund.

You subsequently entered into a Deed of Release and Indemnity (the Deed) between yourself, the Trustee of the Fund and your employer in which you accepted the settlement sum and the terms of the settlement set out by the Trustee of the Fund.

A clause of the Deed specified that any taxation liability that may arise referrable to the settlement sum was your sole responsibility.

You received an email confirmation from the relevant entity during the 2011-12 income year to acknowledge receipt of the Deed as signed by yourself.

You received the settlement sum pursuant to a clause of the Deed which was paid to your nominated bank account during the 2011-12 income year with a remittance advice from the Fund referring to the amount as "legal settlement of compensation payment".

Relevant legislative provisions

Income tax Assessment Act 1997 Section 301-115

Income tax Assessment Act 1997 Subsection 301-115(2)

Income tax Assessment Act 1997 Section 307-5

Income tax Assessment Act 1997 Subsection 307-5(1)

Income tax Assessment Act 1997 Subsection 307-5(7)

Income tax Assessment Act 1997 Subsection 307-120

Income tax Assessment Act 1997 Subsection 307-295(2)

Income tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 118-20.

Income Tax Assessment Act 1997 Section 118-22.

Superannuation Industry (Supervision) Act 1993 Section 10

Reasons for decision

Summary

The amount paid by the Trustee of the Fund as a settlement lump sum pursuant to the Deed of Release and Indemnity is a superannuation lump sum payment and is assessable income.

The superannuation lump sum payment is taxable at the rate of 30% plus medicare levy and is not subject to capital gains tax.

The amount offered by the Trustee of the Fund as settlement for your claim in respect of compensation for financial loss is not taxable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)

The amount offered by the Trustee of the Fund as settlement for your claim in respect of compensation for financial loss is not assessable as a capital gain.

Detailed reasoning

Under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), a 'superannuation fund' is defined to have the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) that is:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

A 'public sector superannuation scheme' is also defined in subsection 995-1(1) of the ITAA 1997 as having the same meaning as in the SIS Act.

Section 10 of the SIS Act defines a 'public sector superannuation scheme' as a scheme for the payment of superannuation, retirement or death benefits, where the scheme is established:

(a) by or under a law of the Commonwealth or of a State or Territory; or

(b) under the authority of:

(i) the Commonwealth or the government of a State or Territory …

The Fund meets the definition of a 'public sector superannuation scheme' as defined in subsection 995-1(1) of the ITAA 1997.

Superannuation fund payment

A 'superannuation fund payment' is defined has having the meaning given in section 307-5 of the ITAA 1997.

In the table in subsection 307-5(1), a 'superannuation benefit 'is a payment described in the table at column 2 as including a 'superannuation fund payment'.

Superannuation member benefit

A 'superannuation member benefit' is a payment to you from a superannuation fund because you are a fund member.

Subsection 307-5(2) defines a 'superannuation member benefit' is a payment that is described in column 2 of the table.

A 'superannuation benefit' includes a 'superannuation fund payment' made to you from a superannuation fund because you are a fund member. When it is paid to you as a lump sum, this is referred to as a 'superannuation lump sum' payment'.

Superannuation lump sum

A 'superannuation lump sum' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given in section 307-65 and means a 'superannuation benefit' that is not a 'superannuation income stream benefit'.

From the information provided, it is evident the settlement sum you received is not a superannuation benefit that is paid from a superannuation income stream (as defined in section 307-70).

Taxation of a superannuation benefit that is a superannuation lump sum

The components of a 'superannuation benefit' are worked out under section 307-120 of the ITAA 1997and will consist of the tax free component and the taxable component.

We note that you view the settlement sum should be considered as reflecting the amount of fund earnings that you had lost. However, the essential character of the payment you received is an amount from the Trustee of the Fund pursuant to the Deed of Release and Indemnity that you entered into with the Trustee of the Fund.

The Fund is a public sector superannuation scheme and not a constitutionally protected fund. Section 307-295 applies to a superannuation benefit that is paid from a public sector superannuation scheme that is not a constitutionally protected fund.

Therefore, in accordance with subsection 307-295(2), if the 'superannuation benefit' paid is not sourced to any extent from contributions made into a superannuation fund or earnings on such contributions, the taxable component of the superannuation benefit consists wholly of an element untaxed in the fund.

Accordingly, the 'superannuation lump sum' you received consists wholly of an element untaxed in the fund and is assessable income under subsection 301-115 and subject to a tax rate of 30% plus the applicable medicare levy. You are entitled to a tax offset that ensures that the rate of income tax on the amount does not exceed 30%.

Compensation payments

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82) (Dixon's case). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, and Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641).

In this case, the compensation payment received did not compensate for loss of ordinary income such as a pension; it was to compensate for the reduced value of your equity in the Fund due to a decision made by the Trustee of the Fund.

The payments are therefore not regarded as ordinary income and are not assessable under subsection 6-5(2) of the ITAA 1997.

Capital Gain

You make a capital gain if the capital proceeds received for the ending of a CGT asset are greater than the cost base of that asset.

The right to sue is a CGT asset you have given up by accepting the payment offered from the Trustee of the Fund as compensation for your financial loss.

Sections 118-20 and 118-22 of the ITAA 1997 would be applicable to your circumstances as it refers to superannuation lump sum payments. Your payment will be included as assessable income therefore under the anti-overlap legislation the capital gain made will not be assessed.