Edited version of private advice

Authorisation Number: 1051935140636

Date of advice: 21 December 2021

Ruling

Subject: Compensation

Question 1

Is the 'investment earnings' amount included in assessable income?

Answer

Yes.

Question 2

Is the refunded fees amount assessable as a capital gain?

Answer

Yes.

Question 3

If the refunded fees amount is assessable as a capital gain, does the 50% CGT discount apply?

Answer

Yes.

Question 4

Are the residuary beneficiaries presently entitled such that they each include their share of the assessable income in relation to the remediation payment in their own individual income tax return?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trustee for the Estate ('you') received a payment during the 20XX-XX income year from the financial institution due to the deceased having been charged fees for no service with respect to investments the deceased previously had.

The deceased estate was fully administered several years ago. The deceased estate had X residuary beneficiaries. You have delayed distributing the compensation to the beneficiaries until you confirm the tax implications of the payment.

The payment consists of a refund of the fees ($X) and an 'investment earnings' amount ($X).

Deductions were previously claimed by the deceased for the fees that have now been refunded.

The 'investment earnings' amount was calculated for the period from the date each fee was originally charged to the payment date using the Reserve Bank of Australia's cash rate plus X%.

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 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 110-45(2)

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 115-30

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1936 section 97

Reasons for decision

Question 1

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts states that interest awarded as part of a compensation amount is assessable income of the taxpayer under the general income provisions.

The 'investment earnings' amount is an amount in the nature of interest. Therefore, it is considered to be assessable income.

Question 2

A capital gains tax (CGT) asset, being the right to seek compensation for the overcharged fees, was held by the deceased before passing to the deceased estate, even though neither the deceased nor the estate were aware of the asset.

The overcharged fees are excluded from the cost base of the CGT asset as these amounts were claimed as deductions by the deceased (subsection 110-45(2) of the Income Tax Assessment Act 1997 (ITAA 1997)). The entire payment (refunded fees and 'investment earnings' amount) forms the capital proceeds and the cost base is nil, so the capital gain is the amount of the payment. However, as the 'investment earnings' amount is assessable as ordinary income, the anti-overlap provision (section 118-20 of the ITAA 1997) applies to reduce the capital gain by this amount.

Therefore, in effect, the refunded fees amount is assessable as a capital gain.

Question 3

Although the deceased and then their estate were not aware that they held the right to seek compensation, nevertheless the right was held for at least 12 months. Consequently, the 50% CGT discount applies to the capital gain in relation to that right (sections 115-10, 115-25 and 115-30 of the ITAA 1997).

Question 4

Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates states that residuary beneficiaries are presently entitled to income derived after administration of a deceased estate is complete.

In the present case, as the administration of the deceased estate has been completed, each of the residuary beneficiaries include their share of the assessable income in relation to the remediation payment in their own individual income tax return (section 97 of the Income Tax Assessment Act 1997).

The 'investment earnings' amount was derived when it was received by the deceased estate. Also, the capital gain in relation to the right to seek compensation arose on the satisfaction of the right when the remediation payment was received by the deceased estate. Consequently, the relevant tax return in which each of the beneficiaries should declare their share of the assessable income in relation to the remediation payment, is their 20XX-XX tax return.