Edited version of your written advice

Authorisation Number: 1051197018251

Date of advice: 2 March 2017

Ruling

Subject: Compensation

Question 1

Has the compensation lump sum been paid out of a superannuation fund and should it be treated as a lump sum superannuation payment?

Answer

No.

Question 2

Is the compensation lump sum assessable to the taxpayer?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20ZZ

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

In 20XX, you entered into an agreement with a Financial Planner to provide you with various ongoing adviser services. (Ongoing Adviser Services).

In 20YY, after a review of the Financial Planner's records, the financial group offered you a compensation payment (Refund) as the Ongoing Adviser Service provided by the Financial Planner did not meet agreed service expectations.

The financial group had determined the offer of compensation based on the following components:

a) a refund of the ongoing adviser fees between

b) an amount representing the benefit lost due to not being switched to a service with a lower account fee

c) an amount representing the disadvantage you experienced as a result of being invested differently from your agreed risk profile; and

d) a refund of a break fee to allow your funds to be rolled over into another service.

By accepting the terms of the offer of compensation, you agreed that the Refund was in full and final settlement of the review of the financial planning advice fees and charges incurred by your accounts from the Financial Planner over the term of your financial advice relationship.

In consideration of the Refund, you released the company and its officers, employees, agents and representatives from all claims, proceedings, actions, damages, costs and expenses which you had relating to the Refund.

The Refund was sourced from the financial group and paid directly to the client's personal account as a gross 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 108-5

Income Tax Assessment Act 1997 Subdivision 110-A

Income Tax Assessment Act 1997 Subsection 307-5

Reasons for decision

Question 1

Superannuation benefit

1. 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.

2. In this instance, the lump sum payment is to be made from the bank and not from your client's superannuation fund.

3. Accordingly, the payment does not meet the definition of a superannuation fund payment set out in Income Tax Assessment Act (ITAA 1997) section 307-5.

Conclusion

4. The compensation lump sum payment was not made out of the superannuation fund and should not be treated as a superannuation lump sum payment.

Question 2

Summary

5. The compensation payment is not regarded as ordinary assessable income.

6. The compensation payment received is considered to be capital in nature and assessable under the capital gains tax provisions as capital proceeds from your right to seek compensation.

Detailed Reasoning

7. A payment or other benefit received by a taxpayer is assessable income if it is:

a) income in the ordinary sense of the word (ordinary income); or

b) an amount or benefit that through the operation of the provisions of the tax law is included in assessable income (statutory income).

Ordinary income

8. Subsection 6-5(1) of the ITAA 1997 provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). The legislation does not provide specific guidance on the meaning of income according to ordinary concepts, however, a substantial body of case law exists which identifies likely characteristics.

9. Characteristics of ordinary income that have evolved from case law include receipts that:

a) are periodical, regular or recurrent;

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

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

10. Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. The payment is not assessable as ordinary income in your hands as it is not a product in a real sense of any employment, services or business carried on by you and it does not have the characteristics normally associated with ordinary income such as periodicity and reliance on the payments to meet regular expenditure.

11. The acceptance of the offer of compensation was to resolve the dispute between the bank and you. You agreed to release the bank in consideration of the Refund. We consider this to be compensation not related to income lost but paid in consideration of the releases contained in the offer of compensation.

12. Accordingly, the Refund received by you is capital in nature and does not constitute ordinary income under subsection 6-5(1) of the ITAA 1997

Statutory income - capital gains

13. Section 102-5 of the ITAA 1997 provides that a taxpayer's assessable income includes a net capital gain. A capital gain or loss is made only if a CGT event happens. For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset.

14. A CGT asset is defined in paragraph 108-5(1)(b) of the ITAA 1997 as including a legal or equitable right that is not property. Taxation Ruling 95/35 Income tax: capital gains: treatment of compensation receipts considers the CGT consequences for compensation.

15. Paragraph 70 of TR 95/35 provides that in determining the most relevant asset for which the compensation has been received, it is often appropriate to adopt a 'look-through' approach to the transaction which generates the payment.

16. The 'look-through' approach is defined in paragraph 3 of TR 95/35 to be the process of identifying the most relevant asset. It requires an analysis of all of the possible assets of the taxpayer in order to determine the asset to which the compensation amount is most directly related.

17. If the amount of compensation is not received in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

18. CGT event C2 happens when the ownership of an intangible CGT asset ends by the asset being satisfied or surrendered. A C2 event can apply where there is a release or discharge of a right to sue on the settlement of a legal dispute (See Re Coshott and FCT [2014] AATA 622).

19. In this case we consider that the compensation you received relates to the disposal of your right to seek compensation. The right to seek compensation was acquired at the time of the compensable wrong or injury and includes all the rights arising during the process of pursuing the compensation claim. CGT event C2 happened when you accepted the offer of compensation.