Edited version of your written advice

Authorisation Number: 1051177759588

Date of advice: 5 January 2017

Ruling

Subject: Settlement offer

Question

Is the offer of settlement to be paid from a super fund for giving incorrect advice on your associate pension assessable income?

Answer

No

This ruling applies for the following period(s)

Year ended 30 June 2017

The scheme commences on

1 July 2016

Relevant facts and circumstances

You have been offered a settlement payment as a result of incorrect information being provided to you regarding the age at which you could claim your associate pension.

The offer has been made by a super fund which indicated you could claim the pension from age 55. However you cannot claim your benefit until you meet your preservation age.

The payment is for the financial detriment you suffered as a result of the actions you took based on the expectation that you would be able to receive a pension from age 55. The payment is not for a pension you should have received.

The payment will be made from Super Fund A.

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 118-305.

Income Tax Assessment Act 1997 section 307-5

Governance of Australian Government Superannuation Schemes Act 2011 paragraph 35(3)(b)

Reasons for decision

In order to determine if the settlement payment is assessable income we need to consider 3 questions:

1. Will the offer of settlement be paid out of a superannuation fund and should it be treated as a lump sum superannuation payment?

2. Is the offer of settlement assessable to you as ordinary income?

3. Is the offer of settlement assessable to you as a capital gain?

Is the offer of settlement a lump sum superannuation payment?

Superannuation benefit

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.

In this instance, the lump sum payment is to be made from Super Fund A. However, the payment is not to be made because you are a fund member. Rather, you are an associate member, or non-member spouse.

In accordance with subsections 307-5(5) and 307-5(6) of the Income Tax Assessment Act 1997 (ITAA 1997), a payment paid to you because another person is a member of a superannuation fund can be treated as a superannuation benefit if it is a family law superannuation payment.

In your case the payment you will receive will be made in accordance with paragraph 35(3)(b) of the Governance of Australian Government Superannuation Schemes Act 2011 (GAGSS Act). Accordingly, it does not meet the definition of a family law superannuation payment set out in subsection 307-5(7) of the ITAA 1997.

Accordingly the compensation lump sum payment to be made out of the superannuation fund should not be treated as a superannuation lump sum payment.

Is the offer of settlement assessable as ordinary income?

Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

Based on case law, it can be said that ordinary income generally includes receipts that are earned, expected, relied upon, and have an element of periodicity, recurrence or regularity.

In your situation you have been offered a settlement payment as a result of incorrect information being provided to you regarding the age at which you could claim your associate pension. The payment is not earned by you as it does not relate to services performed.

The payment is also a one off payment and thus it does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation does not arise from a relationship to personal services performed.

Accordingly, the payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

Is the offer of settlement assessable to you as a capital gain?

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.

Taxation Ruling TR 95/35 considers the treatment of compensation payments and the capital gains tax (CGT) consequences for the recipient. TR 95/35 states that the particular asset for which compensation has been received by the taxpayer may be:

● an underlying asset;

● a right to seek compensation; or

● a notional asset in terms of section 104-155 of the ITAA 1997.

In determining the most relevant asset it is often appropriate to adopt a 'look through' approach to the transaction or arrangement which generates the compensation receipt.

Paragraph 3 of TR 95/35 provides definitions for some of the key terms used in the ruling. The definitions provide that 'permanent damage or reduction in value' does not mean everlasting damage or reduced value, but refers to damage or reduction in value which will have permanent effect unless some action is taken by the taxpayer to put it right.

'Underlying asset' is defined as the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity (TR 95/35).

Paragraphs 6 to 9 of TR 95/35 provide the following guidelines on the treatment of compensation for permanent damage to or permanent reduction in the value of the underlying asset:

If an amount of compensation is received by the taxpayer wholly in respect of permanent damage suffered to a post-CGT underlying asset of the taxpayer or for a permanent reduction in the value of a post-CGT underlying asset of the taxpayer, and there is no disposal of the underlying asset at the time of the receipt, we consider that the amount represents a recoupment of all or part of the total acquisition costs of the asset.

Accordingly, the total acquisition costs of the post-CGT asset should be reduced in terms of section 110-25 of the ITAA 1997 by the amount of the compensation.  No capital gain or loss arises in respect of that asset until the taxpayer actually disposes of the underlying asset.

The adjustment of the total acquisition costs effectively reduces those costs by the amount of the recoupment as if those costs had not been incurred.

Compensation received by a taxpayer has no CGT consequences if the underlying asset which has suffered permanent damage or a permanent reduction in value was acquired by the taxpayer before 20 September 1985 or is any other exempt CGT asset.

In your case, the underlying asset is your right to a capital amount payable out of a superannuation fund. As a result of receiving incorrect advice, there was a reduction in the value of the pension you were expecting.

Although in the future the value of your pension may increase to the point where it exceeds what it was before the loss occurred, the value of your pension will always be lower than what it could have been had the loss not occurred. Therefore, it is considered that there has been a permanent reduction in value of your right to a capital amount payable out of the superannuation fund.

Subsection 118-305(1) of the ITAA 1997 disregards any capital gain or loss if you make it from a CGT event in relation to any of the following;

● a right to an allowance, annuity or capital amount payable out of a superannuation fund

● a right to an asset of such a fund

● a right to any part of such an allowance, annuity, capital amount or asset.

The compensation you will receive is in relation to the permanent reduction in value of your right to a capital amount payable out of a superannuation fund. Therefore, any capital gain or loss you made is disregarded under section 118-305 of the ITAA 1997.

Conclusion

The lump sum payment you will receive in respect of your reduced pension is not ordinary income. Additionally, as the lump sum payment will be made in respect of the permanent reduction in value of your right to a capital amount payable from a superannuation fund, any capital gain or loss made from the payment is disregarded.