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Edited version of private advice
Authorisation Number: 1052217173616
Date of advice: 1 February 2024
Ruling
Subject: Compensation - inappropriate advice
Question 1:
Does the interest component amount of the compensation payment form part of the beneficiary's assessable income?
Answer:
Yes.
Any amount that is in the nature of interest received in addition to the base compensation amount, is ordinary income and will need to be included in the beneficiary's return in the year it is received under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).
Therefore, the $XX,XXX of interest will be assessable to the beneficiary in the income year they receive it.
Question 2:
Is the remainder of the compensation payment subject to the capital gains tax provisions?
Answer:
Yes.
The remainder of the compensation payment of $XXX,XXX is not regarded as ordinary income. This amount is capital in nature and is subject to the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997.
Question 3:
Will the beneficiary need to include the remainder of the compensation payment in his income tax return?
Answer:
No.
Any capital gain made in relation to the remainder of the compensation amount of $XXX,XXX will be disregarded under section 118-305 of the ITAA 1997.
This ruling applies for the following period:
Year ending XXXX
The scheme commenced on:
1 July 2023
Relevant facts and circumstances
The deceased passed away approximately X years ago. Prior to their death the deceased was retired and their superannuation fund account was in 100% pension phase. There were no financial dependants at the time of their death. Their child is the sole beneficiary of the Estate.
In 20yy a financial institution contacted the estate with a compensation offer, after determining that the deceased incurred a financial loss due to the financial advice that they received regarding their account.
The compensation offer was for a total of $XXX,XXX, comprising $XXX,XXX compensation for the net financial loss, and interest of $XX,XXX.
The estate has been wound up. The payment will be made to the sole beneficiary.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 118-305
Income Tax Assessment Act 1997 Part 3-1
Income Tax Assessment Act 1997 Part 3-3