Edited version of your written advice

Authorisation Number: 1051337155593

Date of advice: 13 February 2018

Ruling

Subject: Compensation

Question 1

Is the investment compensation of $xxxx assessable as ordinary income?

Answer

No

Question 2

Are there any capital gains tax (CGT) consequences as a result of the lump sum payment you received for inappropriate financial advice compensation?

Answer

No

Question 3

Is your share of the interest compensation of $xxxxx assessable as ordinary income?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2018

The scheme commences on

1 July 2017

Relevant facts and circumstances

On xxxx you xxxxx were provided with a statement of advice (SOA) from your financial service provider (FSP) xxxxx. The recommendations included:

● Consolidate your xxxxxx superannuation funds

● Make non-concessional contributions to superannuation

● Make personal concessional contributions to superannuation

● Borrow xxxxxx against your home and use these funds to make a non-concessional contribution to xxxxx superannuation

● Start account based pensions

You xxxx implemented your FSP’s recommendations (apart from the xxxxxxx borrowed funds that were contributed to your xxxxxx superannuation not xxxx. This meant the subsequent account based pension was started in your name.

You xxx lodged a dispute with the Relevant Ombudsman Service Australia against your Financial Provider for inappropriate advice.

You xxxx dispute was the advice to borrow xxxxxx against your main residence and invest these funds in superannuation was inappropriate.

The determination dated xxxxxx was in your favour and stated xxxxx had suffered a loss of xxxxx as a result of the inappropriate advice.

The determination stated the Financial Provider must pay xxxxx compensation within 30 days of your acceptance of the determination by the Relevant Financial Service. The Financial Provider must also pay interest at the Australian Bureau of Statistics consumer price index rate from the date of the decision to the date payment is made.

Your Financial Provider paid the determined amount of xxxxx on xxxxxx. The amount included interest of $xxxxx.

The compensation payment and interest was paid into joint account xxxxx.

Relevant legal 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 financial loss of your superannuation investment is not regarded as ordinary income. Additionally, as the compensation 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.

Your share of the interest component of the compensation payment is regarded as ordinary income. Therefore, the interest payments you received as part of your compensation 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 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

● 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 is an amount separately identified as interest. This amount is assessable as ordinary income in the year of receipt.

The investment compensation payment that you received is in respect of a review conducted by the Relevant Ombudsman Service because your Financial Provider provided inappropriate advice which caused your superannuation not to perform as well as it should have. The payment was not earned by you as it does not relate to services performed. The payment was a one off payment and 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 investment compensation payment is not ordinary income and 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 CGT asset is your right to a capital amount payable out of a superannuation fund in the form of your superannuation account. As a result of the actions of your financial advisor, there was a reduction in the value of your superannuation 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 investment 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. This amount is not assessable under any other provision.