Private ruling: CGT - compensation payment
Date of advice: 14 November 2025
Published: 5 January 2026
Ruling period: Year ended DDMMYYYY
Date scheme commenced: DDMMYYYY

Ruling: Q1: Is the interest component of the compensation payment of $xx assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Is the 'Capital Proceeds' component of the compensation payment of $xx a C1 CGT Event for capital gains tax purposes under section 104-20 of the ITAA 1997? | A2: No | Q3: Is the remaining amount of compensation received of $xx (less interest of $xx and Capital Proceeds of $xx) assessable as ordinary income under section 6-5 of the ITAA 1997? | A3: No | Q4: Did a CGT event happen in relation to the remaining amount of compensation received of $xx (less interest of $xx and Capital Proceeds of $xx)? | A4: Yes

Relevant facts and circumstances: In 2012, an authorised representative of xx Limited, advised your members, xx and xx, to rollover their super into xx Super Accounts. In 2013, a SMSF was advised to be established, where secondary xx Super Accounts were set up for both members. The members were then advised to invest $xx in a property unit trust and $xx for a deposit on an apartment at xx. The apartment building was sold on DDMMYYYY. XX Limited conducted a review after concerns were raised. The review determined that the financial advice given was not appropriate for xx & xx goals and circumstances. The costs, risks & complexity involved in a SMSF were also not sufficiently explained and their member balances of approximately $xx were not adequately considered. As a result, a compensation payment was awarded to the trustee of the xx Super Fund. You received a compensation payment of $xx in the YYYY/YY financial year relating to a financial loss which resulted from inappropriate superannuation and investment advice. The offer of compensation was conditional on you transferring rights via Deed of Assignment to the property unit trust to xx Limited. The compensation amount has been determined by comparing the members actual position to where they would have been had they invested in a retail fund. The compensation payment detailed breakdown was as follows: • Advice/Implementation Fees $xx • Ongoing maintenance of the SMSF $xx; • SMSF Establishment Fees $xx; • Estimated tax $xx; • SMSF wind up fees $xx; • Capital proceeds for sale of Property Trust Units & Apartment $xx (the Capital Proceeds amount); • Interest $xx; and • Investment Compensation $xx.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-20(1) | Income Tax Assessment Act 1997 paragraph 108-5(1)(b) | Income Tax Assessment Act 1997 section 118-305 ATO view documents | Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts | Taxation Determination TD 1999/79 Income Tax: capital gains: does the expression 'lost or destroyed' for the purposes of CGT event C1 in subsection 104-20(1) of the Income Tax Assessment Act 1997 apply to:(a) a voluntary 'loss' or 'destruction'? (b) intangible assets?

Reasons for decision: Detailed Reasoning - Question 1: Section 6-5 of the 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 considered an argument raised that interest in relation to compensation is not interest that is ordinary income; rather the claim is that the interest represents a capital amount which is simply part of the compensation, and which effectively represents part of the consideration received on the disposal of either the underlying asset or the right to seek compensation, as the case may be. However, TR 95/35 did not accept this view. It states: 237. Interest has been described as 'payment by time for the use of money' (Rowlatt J in Bennett v. Ogston (1930) 15 TC 374 at 379). In economic terms, interest is the return or compensation for the use or retention by one person of a sum of money belonging or owed to another. Court rules allow the Court to include in compensation interest on the whole or part of the amount for the whole or part of the period to which the judgment relates. 238. Any interest awarded as part of compensation is interest within the general meaning of that term. It represents assessable income of the taxpayer even when the judgment provides only for a single lump sum which would otherwise be a capital receipt ( Federal Wharf Co Ltd v. DFC of T (1930) 44 CLR 24; 1 ATD 70 and Riches v. Westminster Bank Ltd [1947] AC 390). 246. It is a question of fact to be determined in each case whether any part of the compensation received by the taxpayer is in the nature of interest. We consider that any amount which is in the nature of interest, and which can be identified as interest, and whether paid as part of the compensation or separately, constitutes assessable income of the taxpayer under the general income provisions. Consequently, the interest component of $xx is assessable as ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Question 2: Section 102-5 of the ITAA 1997 includes a net capital gain in the assessable income of a taxpayer. Broadly, a net capital gain is the difference between a person's capital gains and capital losses for an income year. A capital gain or capital loss is made when a CGT event happens to a CGT asset under section 102-20 of the ITAA 1997. CGT event A1 in section 104-10 of the ITAA 1997 happens if you dispose a CGT asset, or your ownership interest in a CGT asset. The time of the event is when you enter into the contract for the disposal. You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. Subsection 104-20(1) of ITAA 1997 states that CGT event C1 happens if a CGT asset you own is lost or destroyed. The time of the event is when you first receive compensation for the loss, or if you receive no compensation - when the loss is discovered. The words 'lost' and 'destroyed' are not defined in the Acts and they take their ordinary meaning. Paragraph 2 of Taxation Determination TD 1999/79 : Income Tax: capital gains: does the expression 'lost or destroyed' for the purposes of CGT event C1 in subsection 104-20(1) of the Income Tax Assessment Act 1997 apply to:(a) a voluntary 'loss' or 'destruction'? (b) intangible assets? states: The word 'lost' in its context in subsection 104-20(1) does not contemplate voluntary actions. The Macquarie Dictionary , 3rd ed, defines 'lost' as '1. past tense and past participle of lose' and defines 'lose' as '1. to come to be without, by some chance, and not know the whereabouts of: ' to lose a ring '. The word in its context in CGT event C1 suggests an involuntary rather than a voluntary act. Paragraph 70 of TR 95/35 provides that in determining the most relevant asset in respect of which the compensation has been received, it is often appropriate to adopt a 'look-through' approach to the transaction which generates the compensation receipt. The 'look-through' approach is defined in paragraph 3 of TR 95/35 as follows: The 'look-through' approach is the process of identifying the most relevant asset. It requires an analysis of all of the possible assets of the taxpayer in order to determine the asset to which the compensation amount is most directly related. It is also referred to in this Ruling as the underlying asset approach. 'Underlying asset' is also defined in paragraph 3 of TR 95/35 as follows: The underlying asset is the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity. If there is more than one underlying asset, the relevant underlying asset is the asset which leads directly to the payment of the amount of compensation. For example, if a taxpayer receives an amount of compensation for the destruction of his or her truck, the truck is the underlying asset. Where the underlying asset for which the compensation relates has been disposed of, the compensation is considered to be additional capital proceeds for the disposal. In your case, you received compensation following the inappropriate advice to invest in a property unit trust and to purchase an apartment. The apartment building has been sold and, as part of compensation offer, you transferred the rights of the unit trust via a Deed of Assignment to xx Pty Ltd. Applying the 'look-through' approach, the most relevant asset to which the Capital Proceeds portion of the compensation amount most directly relates are the investments themself. The sale of the assets was not an involuntary disposal. Therefore, CGT event C1 is not applicable in these circumstances. CGT event A1 happened when the assets were disposed of. The amount of the compensation payment you received in relation to the Property Unit Trust and the apartment purchase constitutes additional capital proceeds from the disposal of your investments which triggered CGT event A1. As such, the Capital Proceeds portion of the compensation payment are additional capital proceeds for the CGT events (A1) that happened when you disposed of your investments. | Detailed Reasoning - Ordinary income: Section 6-5 of the ITAA 1997 does not provide specific guidance on the meaning of income according to ordinary concepts (ordinary income), however likely characteristics of ordinary income that have evolved from case law include receipts that: • are periodical, regular or recurrent; • are relied upon by the recipient for their regular expenditure and paid to them for that purpose; and • are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient. Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. In your case, the remainder component (apart from the interest component and Capital Proceeds for the Property Unit Trust and the apartment) was calculated based on the difference between the actual fund at the end of the compensation period and what the balance would have been at that time if you had invested in a retail fund. The remainder component you received is not assessable as ordinary income for these reasons: • the amount is a one-off receipt and therefore does not have any elements of periodicity, regularity or recurrence. • the amount does not relate to your employment, or services rendered by you. Consequently, the remainder component is not assessable as ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Statutory income - Capital gains: Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997. CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including being released or cancelled (subsection 104-25(1) of the ITAA 1997). The time of the C2 event is when you enter into the contract that results in the asset ending, or if there is no contract - when the asset ends under subsection 104-25(2) of the ITAA 1997. Paragraph 108-5(1)(b) of the ITAA 1997 specifically includes a legal or equitable right within the definition of a CGT asset. A taxpayer's right to seek compensation is therefore classified as an intangible CGT asset. The reasons for why the remainder component was paid is an important factor in determining whether an asset has been disposed of for CGT purposes. TR 95/35 discusses the various scenarios, including: • disposal of the underlying asset, • compensation for permanent damage to, or permanent reduction in value of, the underlying asset, and • disposal of the right to seek compensation. In your case, the transaction which generated your receipt of the remaining amount of the compensation payment was a result of the inappropriate advice provided to you which resulted in a financial loss. The relevant CGT asset in your case is the disposal of the right to seek compensation. The right to seek compensation is an intangible CGT asset (acquired at the time you made a financial loss due to the inappropriate advice) and your ownership of that asset ended when you accepted the compensation payment to settle your claim. At that time CGT event C2 happened and the remainder component of the compensation are capital proceeds from a CGT C2 event happening. | Detailed Reasoning - Superannuation exemption: Section 118-305 of the ITAA 1997 provides a CGT exemption to disregard a capital gain or loss for a CGT event happening in relation to superannuation in certain circumstances. However, paragraph 118-305(2)(a) of the ITAA 1997 states that the exemption is not available to the trustee of a super fund where the CGT event happens in relation to a CGT asset of the fund. In this case, the compensation was received by the trustees of the super fund for deficient advice provided to the fund in relation to investments held by the fund. The CGT event happens to a CGT asset of the fund whether it was particular investment assets or the right to seek compensation. Consequently, paragraph 118-305(2)(a) of the ITAA 1997 applies to deny an exemption under section 118-305 of the ITAA 1997.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for xx. | This is to explain how we reached our decision. This is not part of the private ruling. | Issue: Tax treatment of compensation payment received for inappropriate superannuation and investment advice