Where a super fund has a right to seek compensation from a financial services provider, the financial service provider may pay to the super fund compensation (in satisfaction of that right) that reflects any of the following:
- the adviser fees paid
- an amount corresponding to the loss of value of the investment as a result of paying the fees
Where a super fund is paid compensation under these circumstances, the following consequences apply.
If the adviser fees were an allowable deduction to the super fund when originally paid, the compensation amount reflecting the fees will be an assessable recoupment under section 20-20 of the ITAA 1997.
If the fees were not an allowable deduction to the super fund when originally paid, the compensation amount reflecting the fees will not be an assessable recoupment. Instead, the amount will reduce the cost base of any underlying investment. If the investment has been disposed of, it will form part of the capital proceeds received in relation to any capital gains tax (CGT) event. If the trustee determines that the amount cannot be attributed to any particular asset(s) of the fund, the compensation amount will be capital proceeds for the ending of the right to seek compensation. The super fund may be eligible to apply the CGT discount if the asset has been held for 12 months or longer.
Compensation for earnings and interest will normally be assessable income to the super fund. However, if a compensation amount received by a super fund for loss of earnings or interest is part of the capital proceeds received in relation to a CGT event of the fund (including a right to seek compensation), the amount received will reduce the cost base of any underlying investment.
If the investment has been disposed of, the amount is considered to be additional capital proceeds in relation to any relevant CGT event.
If the trustee determines that the amount cannot be attributed to any particular asset(s) of the fund, the compensation amount will be capital proceeds for the ending of the right to seek compensation. The super fund may be eligible to apply the CGT discount if the asset has been held for 12 months or longer.
As a general comment, the GST consequences for a super fund should typically mirror the GST implications for the financial service provider. You should work with your financial supply provider to ensure the correct GST treatment is adopted by both parties.
A super fund will need to consider whether it is required to repay the GST credits claimed where the super fund receives a compensation amount that reflects a refund of fees paid to a financial service provider and the super fund had previously claimed GST credits or reduced GST credits on the fees.
Depending on the circumstances, the refund of fees may result in:
- a reimbursement of passed-on GST where a supply was never made (under Division 142 of the GST Act), in which case the super fund may need to make an amendment to correct the business activity statement (BAS) in which it originally claimed the GST credits (subject to time limits), or
- an adjustment to an earlier supply made by the financial service provider, in which case the super fund may need to make an increasing adjustment in its current BAS (when it receives the refund).
Determining which scenario is relevant can depend on a range of factors, including:
- whether the financial service provider made a supply to the super fund
- the terms of the original contract with the financial service provider
- the terms of the settlement or payment deed (including whether the payment may be compensation – see below).
If a compensation amount received by a super fund includes a component of interest, or compensation for loss of earnings, this component will not be subject to GST. This is because such a payment is not consideration for a supply.
The compensation amount received will not be a super contribution for the benefit of a member of the super fund if the trustee of the super fund allocates an amount to the member's super interest in respect of the compensation. This is because the compensation amount does not result in the capital of the super fund being increased – the right to compensation has been satisfied by the compensation amount.
Example: Fees for no service
ABC Super Fund has a legal arrangement with DEF Financial Services where the fund pays DEF Financial Services to provide financial advice to ABC Super Fund members. The advice is limited to a member's super interest in the super fund.
ABC Super Fund claimed a deduction for the fees paid for the financial advice and also claimed reduced GST credits.
ABC Super Fund reviewed their members' super interests and determined that advice was not provided to one of their members on joining the fund in 2016, nor subsequently. In 2019, ABC Super Fund enters into a settlement with DEF Financial Services, under which DEF Financial Services makes a payment to ABC Super Fund to compensate the fund for the fees paid where no service was provided ($5,000) and an additional amount for lost earnings and interest ($2,500).
ABC Super Fund allocates an amount to the member's super interest for the compensation received.
The total amount of $7,500 is not a super contribution.
ABC Super Fund includes $5,000 as assessable income in their tax return for the income year they receive the compensation as an assessable recoupment.
The $2,500 related to the amount by which earnings from an interest in a managed investment scheme were reduced due to the advice not being provided. As ABC Super Fund still holds that interest in the managed investment scheme, they would reduce the cost base of the interest by $2,500.
If ABC Super Fund cannot attribute the $2,500 to an underlying asset, then it can be treated as capital proceeds received on the ending of its right to seek compensation. As the right to seek compensation arose in 2016 and ended with payment of compensation in 2019, the relevant asset would have been held for longer than 12 months. Accordingly, ABC Super Fund can apply the CGT discount to a capital gain resulting from the ending of its right to seek compensation.
ABC Super Fund determines that the repayment from DEF Financial Services includes a reimbursement of passed-on GST under Division 142 of the GST Act, in a situation where in fact there was never a supply made. Accordingly, ABC Super Fund will need to make an amendment to the BAS for the period in which it claimed the reduced GST credits (subject to time limits).
The $2,500 component representing lost earnings and interest is not consideration for a taxable supply made by ABC Super Fund.End of example
- Compensation received by super funds from financial institutions and insurance providers
- Deficient financial advice
- Overcharged insurance premiums
- Interim use of reserves
- Payments where no right to seek compensation
Find out about:
- Compensation paid to individuals for advice from financial institutions
- Taxation Ruling TR 95/35 – Income tax: capital gains: treatment of compensation receipts
- Taxation Ruling TR 2010/1 – Income tax: superannuation contributions
- Disposal – CGT event
- Amending an income tax return
- Fixing BAS mistakes or making adjustments
- Correcting GST errors