Edited version of private advice

Authorisation Number: 1052355585998

Date of advice: 07 February 2025

Ruling

Subject: Compensation income

Question 1

Is the interest component you received as part of the compensation payment assessable as ordinary income?

Answer 1

Yes.

Question 2

Is the remainder of the compensation payment you received subject to the capital gains tax provisions?

Answer 2

Yes.

Question 3

If the answer to questions 2 is yes, will any capital gain on the remainder of the compensation payment be disregarded under section 118-305 of the Income Tax Assessment Act 1997?

Answer 3

Yes.

This ruling applies for the following period:

Year ending 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

You are retired.

You are in receipt of a pension phase from your superannuation fund.

On xx xx 20xx you received a letter from the financial advisers used by the superannuation fund of which you are a member, advising a review of the financial advice provided to you in regard to your superannuation investment structure.

The advice received was for the period xx xx 20xx to xx xx 20xx when you were in accumulation phase of your superannuation fund.

You received an amount of $xxxx, comprising compensation of $xxxx and interest of $xxxx, calculated on xx xx 20xx.

The compensation amount was received by you personally and not paid to your superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5>

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 118-37

Income Tax Assessment Act 1997 section 118-300

Income Tax Assessment Act 1997 section 118-305

Income Tax Assessment Act 1997 section 307-5

Reasons for decision

Question 1

Is the interest component you received as part of the compensation payment assessable as ordinary income?

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts, which is called ordinary income.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts (TR 95/35) considers whether interest in relation to compensation is not interest that is ordinary income; but rather, that the interest represents a capital amount which is simply part of the compensation, and represents part of the consideration received on the disposal of either the underlying asset or the right to seek compensation,

The view expressed in TR 95/35 is that interest is the return or compensation for the use or retention of a sum of money owed to another. That is, interest awarded as part of a compensation is interest within the general meaning of that term and represents assessable income of the taxpayer even when the compensation is provided as a lump sum which would otherwise be a capital receipt.

Consequently, the interest component received as part of the compensation payment is assessable as ordinary income.

Question 2

Is the remainder of the compensation payment you received subject to the capital gains tax provisions?

Detailed reasoning

The remainder of the compensation payment you received does not have the characteristics of ordinary income, rather, it is capital in nature and consequently subject to the capital gains tax provisions. Although the amount is in relation to your superannuation, it is not a superannuation benefit under Division 307 of the ITAA 1997. It is not a member benefit. Nor is it an assessable recoupment to you as you had not paid the advice fees and therefore, no fees were deductible to you. The amount was paid to you directly as an individual rather than paid to your superannuation fund as a concessional contribution.

The compensation amount was paid to you as an individual as a result of a right to seek compensation. The compensation you received was in relation to such a right. CGT even C2 happened when that right came to an end and the compensation received is part of the capital proceeds for ending of that right.

Question 3

If the answer to questions 2 is yes, will any capital gain on the remainder of the compensation payment be disregarded under section 118-305 of the ITAA 1997?

Detailed reasoning

In your case, the compensation was received for an error or misrepresentation (a wrong) causing the value of your superannuation interest to be less than it would have been had the wrong not occurred.

You have been paid an amount of compensation equal to the difference between your superannuation pension and what the pension would have been before your retirement.

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

Section 118-305 of the ITAA 1997 does not apply to situations involving compensation amounts for a wrong that does not result in a change in the value of the recipient's superannuation interest. In these cases, the taxpayer never had an entitlement to any amount other than that represented by their existing interest in the superannuation fund. The compensation amount did not result from a change in the value of their interest in a superannuation fund. In those situations, the compensation sought is for an error that misled the taxpayer which was in the general context of their superannuation interest but does not have the requisite connection to 'a right to an allowance, annuity or capital amount payable out of a superannuation fund'.

An amount of compensation for a wrong that results in the value of a taxpayer's interest in a superannuation fund being less than it would have been had the wrong not occurred has the requisite level of connection with an amount payable out of a superannuation fund and so is subject to the exception in subsection 18-305(1) of the ITAA 1997. Any capital gain arising from the receipt of the compensation would be disregarded under section 118-305 of the ITAA 1997.