Edited version of private advice

Authorisation Number: 1052253056490

Date of advice: 28 May 2024

Ruling

Subject: Compensation payment for inappropriate advice - defined benefit scheme

Question 1

Is the interest component you received as part of the compensation payment assessable as ordinary income under section 6-5 (1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

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 your return in the year it is received under section 6-5 of the ITAA 1997.

Question 2

Is the compensation amount assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

No. The payment does not have the characteristics of ordinary income under section 6-5 of the ITAA 1997, such as being relied upon, regular or repeated payments, it was not for any service you had performed, or for any investments. Rather it is capital in nature and potentially subject to the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997.

Question 3

Is the compensation amount you received subject to the capital gains tax provisions?

Answer

Yes. An exemption is provided under section 118-305 of the ITAA 1997 for any capital gain or loss made from a capital gains tax event happening in relation to a right to an allowance, annuity or capital amount payable out of a superannuation fund.

In your case, it is considered that the payment you will receive is in relation to such a right, being a right to provide you with the present value of the superannuation entitlement that you lost as a result of the actions of the advisor. Therefore, you can disregard any capital gain or loss made in relation to receiving the payment.

This private ruling applies for the following period:

1 June 20XX to 30 June 20XX.

The scheme commenced on:

1 June 20XX.

Relevant facts and circumstances

You were an Australian resident for tax purposes for the entire period of the relevant events.

Your advisor provided advice in relation to a superfund scheme.

Your advisor sent you a letter in relation to superfund scheme that was under review advising the following:

•         They had assessed the advice you had received from your advisor and following their review considered the advice to have been inappropriate given their knowledge of your objectives, financial circumstances and needs as advised through the advice process.

•         The inappropriate advice you received, recommended for you to elect an upfront lump - sum payment.

•         They would pay a remediation to put you in the position you would have been in for not the inappropriate advice.

You received the following amounts:

•         compensation for inappropriate advice.

•         unpaid interest.

The calculation determined the difference between the lump sum you received in lieu of the correct payment and the estimated lifetime value at the time you received your Lump Sum payment.

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 118-305