Edited version of private advice

Authorisation Number: 1051585262925

Date of advice: 24 September 2019

Ruling

Subject: Compensation - inappropriate financial advice

Question 1

Will your share of the settlement amounts that relate to capital losses made on investments you acquired as a result of following the inappropriate advice and have sold be treated as 'additional capital proceeds' for the disposal of those investments?

Answer

Yes.

Question 2

Will your share of the settlement amounts that relate to investments you acquired as a result of following the inappropriate advice that you still owned when you received the settlement amounts be treated as a reduction in the cost base of those investments?

Answer

Yes.

Question 3

Is your share of the postage, printing and stationery expenses incurred in relation to the complaints lodged with the Financial Ombudsman Service (FOS) included in the cost base of the investments?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June YYYY to Year ended 30 June YYYY

The scheme commenced on

1 July YYYY

Relevant facts

Financial advice

You obtained financial advice from an individual (the advisor) who acted as an authorised representative of separate businesses.

The advisor recommended that you borrow money and use the borrowed funds to invest in particular investments.

The advisor managed your investment portfolio.

Complaints to FOS

On or around DD/MM/YYYY you lodged complaints with the FOS claiming that the advice provided to you was inappropriate for your circumstances and had caused you loss.

At or around the same time you lodged claims with the separate businesses that subsequently employed your financial advisor complaining that the advice you had received was inappropriate and as a result you suffered financial loss.

Settlement amounts

Following negotiations you agreed to settle all claims.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 subsection 116-20(1)

Income Tax Assessment Act 1997 section 110-25

Reasons for decision

You make a capital gain or capital loss as a result of a capital gains tax (CGT) event happening (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). For most CGT events, your capital gain or loss is the difference between your capital proceeds and the cost base or reduced cost base of your CGT asset.

The capital proceeds from a CGT event include the money you have received, or are entitled to receive, in respect of the event happening (subsection 116-20(1) of the ITAA 1997).

The five elements of a CGT asset's cost base are acquisition costs, incidental costs, non-capital costs of ownership which are not deductible, capital expenditure to increase the value of the asset, and capital expenditure to establish, preserve or defend title to the asset or a right over the asset (section 110-25 of the ITAA 1997).

Treatment of settlement amounts if a CGT event happens (disposal of the asset)

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts discusses the CGT implications for compensation receipts. Paragraph 70 of TR 95/35 provides that in determining the most relevant asset in respect of which the compensation has been received, it is often appropriate to adopt a 'look-through' approach to the transaction which generates the compensation receipt.

The 'look-through' approach is defined in paragraph 3 of TR 95/35 as follows:

The 'look-through' approach is 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. It is also referred to in this Ruling as the underlying asset approach.

'Underlying asset' is also defined in paragraph 3 of TR 95/35 as follows:

The underlying asset is 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.

If there is more than one underlying asset, the relevant underlying asset is the asset which leads directly to the payment of the amount of compensation. For example, if a taxpayer receives an amount of compensation for the destruction of his or her truck, the truck is the underlying asset.

Where the underlying asset for which the compensation relates has been disposed of, the compensation is considered to be additional capital proceeds for the disposal.

Treatment of settlement amounts where a CGT event has not happened

If a CGT event hasn't happened for a particular investment asset, for example an investment is still held, any settlement amounts are still taken into account for capital gains tax purposes. This will be the case even if the asset is of no current value.

Where the settlement amounts can be reasonably related to investment assets, the cost bases of the relevant assets are reduced by the amount of the settlement amounts received. The receipt of the settlement amount does not create a CGT event for the investment assets.

Application to your circumstances

Applying the 'look-through' approach, the most relevant assets to which the settlement amounts relate are the investments themselves.

For the investments you still owned when you received the settlement amounts you will have to apportion the amount received between each investment and reduce the cost base of the investments accordingly.

For the investments which have been sold or redeemed the settlement amounts are considered to be 'additional capital proceeds' for the sale or redemption. You will have to apportion the amounts between each investment and recalculate the capital gain/loss made on the disposals to take into account the additional capital proceeds received.

You will need to recalculate your capital gain/loss amounts for those years for the purposes of reducing any carry forward capital losses you may have had and this may flow forward to affect income tax returns for more recent years.