Private ruling: Bank remediation scheme
Date of advice: 15 November 2023
Published: 8 January 2024
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the interest amount included in assessable income? | A1: Yes. | Q2: Is the refunded fees amount assessable as a capital gain? | A2: Yes. | Q3: If the refunded fees amount is assessable as a capital gain, does the 50% CGT discount apply? | A3: Yes. | Q4: Are the residuary beneficiaries presently entitled such that they each include their share of the assessable income in relation to the remediation payment in their own individual income tax return? | A4: Yes.

Relevant facts and circumstances: You are one of the Executors of a deceased estate (the estate). The estate received a letter from a bank dated XX XXXX 20XX. Receipt of the letter was delayed due to it being sent to an old postal address. The letter advised that a payment was due to the estate and requested information to facilitate the payment. As the estate was finalised, the bank will make the payment to a personal account of one of the executors for distribution according to the will. Accounting, taxation, and correspondence were destroyed nine years after the date of the final tax return. The Executors have retained a copy of probate and the deceased's will. An amount, including interest, was paid as compensation for services paid for a three-year period, that may not have been received. Deductions were previously claimed by the deceased for the fees that have now been refunded. The interest amount was calculated for the period from the date each fee was originally charged to the payment date using the Reserve Bank of Australia's cash rate plus 6% per annum calculated monthly.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 97 | Income Tax Assessment Act 1997 subsection 110-45(2) | Income Tax Assessment Act 1997 section 115-10 | Income Tax Assessment Act 1997 section 115-25 | Income Tax Assessment Act 1997 section 115-30 | Income Tax Assessment Act 1997 section 118-20

Reasons for decision: Summary: Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts states that interest awarded as part of a compensation amount is assessable income of the taxpayer under the general income provisions. The interest amount is assessable income. A Capital Gains Tax (CGT) asset, being the right to seek compensation for the overcharged fees, was held by the deceased before passing to the deceased estate, even though neither the deceased nor the estate were aware of the asset. The overcharged fees are excluded from the cost base of the CGT asset as these amounts were claimed as deductions by the deceased (subsection 110-45(2) of the Income Tax Assessment Act 1997 (ITAA 1997)). The entire payment (refunded fees and interest amount ) forms the capital proceeds and the cost base is nil, so the capital gain is the amount of the payment. However, as the interest amount is assessable as ordinary income, the anti-overlap provision (section 118-20 of the ITAA 1997) applies to reduce the capital gain by this amount. Therefore, in effect, the refunded fees amount is assessable as a capital gain. Although the deceased and then their estate were not aware that they held the right to seek compensation, nevertheless the right was held for at least 12 months. Consequently, the 50% CGT discount applies to the capital gain in relation to that right (sections 115-10, 115-25 and 115-30 of the ITAA 1997). Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates states that residuary beneficiaries are presently entitled to income derived after administration of a deceased estate is complete. In the present case, as the administration of the deceased estate has been completed, each of the residuary beneficiaries include their share of the assessable income in relation to the remediation payment in their own individual income tax return in the year when the payment is received (section 97 of the Income Tax Assessment Act 1997 ). The 'investment earnings' amount is derived when it is received by the deceased estate. Also, the capital gain in relation to the right to seek compensation will arise on the satisfaction of the right when the remediation payment is received by the deceased estate. Consequently, the relevant tax return in which each of the beneficiaries should declare their share of the assessable income in relation to the remediation payment, is the year they receive the remediation payment.