Edited version of your written advice

Authorisation Number: 1051303928699

Date of advice: 6 November 2017

Ruling

Subject: Compensation - investment

Question 1

Is the interest compensation assessable as ordinary income?

Answer

Yes

Question 2

Is the investment compensation assessable as ordinary income?

Answer

No

Question3

Is the capital gain or loss from the investment compensation disregarded under the CGT provisions?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2017

The scheme commences on

1 July 2016

Relevant facts and circumstances

You received advice from an advisor regarding pension investment.

You accepted their advice and invested in a wholesale Pension account.

You withdrew and closed the pension account suffering a loss.

You contacted the Bank, Open Advice Review Program as you believed you had received inappropriate advice.

You accepted the offer of compensation and received a lump sum payment comprised of investment compensation and interest compensation

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 118-305

Reasons for decision

Summary

The investment compensation you received in respect of your complaint surrounding the loss incurred by your superannuation fund is not regarded as ordinary income. Additionally, as the lump sum payment was made in respect of the permanent reduction in value of your right to a capital amount payable from your superannuation fund, any capital gain or loss made from the payment is disregarded.

The interest compensation you received is assessable income in the year of receipt.

Detailed reasoning

Ordinary Income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that your assessable income 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

● are expected

● are relied upon, and

● have an element of periodicity, recurrence or regularity.

Paragraph 26 of Taxation Ruling TR 95/35 deals with the treatment of interest awarded as a part of a compensation amount. It states:

Interest awarded as part of a compensation amount is assessable income of the taxpayer under the general income provisions. If the taxpayer receives a dissected lump sum compensation amount and the interest cannot be separately identified and segregated out of that receipt, no part of that receipt can be said to represent interest.

In your case, you received compensation due to inappropriate financial advice. There are amounts separately identified as interest. The interest amount is assessable as ordinary income in the year of receipt.

The investment compensation payments that you received are in respect of a review conducted by the bank because they had provided inappropriate advice which caused your allocated pension account not to perform as well as it should have. The payments were not earned by you as it does not relate to services performed. The payments were a one off payment and don’t 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.

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.

Capital gains

Taxation Ruling TR 95/35 considers the treatment of compensation payments and the capital gains tax (CGT) consequences for the recipient.

In your case, the underlying asset is your right to a capital amount payable out of a superannuation fund in the form of your allocated pension. As a result of the actions of your financial advisor, there was a reduction in the value of your allocated pension account. Therefore, it is considered that there has been a permanent reduction in value of your right to a capital amount payable out of your 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 received was 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. These amounts are not assessable under any other provision.

ATO view documents

Taxation Ruling TR95/35