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Edited version of your written advice
Authorisation Number: 1051381860563
Date of advice: 13 June 2018
Ruling
Subject: Capital gain – disposal of right to seek compensation
Question
Is the compensation lump sum assessable to the taxpayer?
Answer
Yes.
In your case, we consider that the compensation you received relates to the disposal of your right to seek compensation. The amount represents the underperformance of your investments and is not regarded as ordinary assessable income. These amounts are considered to be capital in nature and assessable under the capital gains tax provisions.
The right to seek compensation was acquired at the time of the first compensable wrong or injury and includes the rights arising during the process of pursuing the compensation claim. The CGT event C2 happened when you accepted the offer of compensation.
This ruling applies for the following period:
Financial year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
In 20XX, as a small investor you entered into an agreement with a Financial Planner on behalf of xx Upon the advice of xx, all your portfolio was invested in a balanced fund earning fully franked dividends and discounted capital gains for the period 20XX to 20XX.
June 20XX – xx wrote to you to advise the financial advice provided by the financial advisor was potentially inappropriate and they completed an advice review.
xx decision was based on the advice given by the advisor being inappropriate and the difference in earning capacity between the portfolios being invested in a balanced fund compared to if the portfolio was placed in the moderate fund. Xx has determined the offer of compensation based on the following components:
1) An amount representing the disadvantage, you experienced as a result of being implemented in an investment strategy, that potentially inappropriate at the time
being the amount of $XX,XXX.XX.
2) The interest of $XXX.XX that would have incurred, if you were put in the appropriate investment portfolio.
You advised the interest amount of $XXX.XX will be assessable income.
20XX - You signed the final settlement of the asset and by accepting the offer of terms of compensation you agreed that the refund was in full and final settlement relating to the financial advice. In consideration of the Refund, you released xx and its officers, employees, agents and representatives from all claims, proceedings, actions, damages, costs and expenses which you had relating to the Financial Advice.
20XX - You signed the deed and you received the compensation payment of $XX,XXX.XX into your personal bank account.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 102-5
Income Tax Assessment Act 1997 section 108-5
Income Tax Assessment Act 1997 Subdivision 104-25