Private ruling: Lump sum compensation
Date of advice: 5 June 2026
Published: 17 August 2026
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Is the interest component you will receive as part of the compensation payment assessable as ordinary income? | A1: Yes. | Q2: Is any capital gain or loss you make on receiving the compensatory amount disregarded? | A2: Yes.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You are retired. You held a superannuation account in accumulation phase that was closed in MM 20YY to fund your entry into aged care. On DD MM 20YY you received a letter from a financial services firm advising a review of the financial advice provided by one of their financial advisers to you between DD MM 20YY to DD MM 20YY. The review found that you had received inappropriate advice. The financial services firm offered you a compensation amount of $xxx,xxx.xx comprising a compensation amount of $xx,xxx.xx and interest of $xx.xxx.xx. The amount was calculated on the assessment period, DD MM 20YY to DD MM 20YY. The interest amount was calculated to DD MM 20YY, plus an additional xx days to allow for payment. The compensation amount was calculated on the difference between comparing the closing balance of your account to the appropriate closing balance of your account had the correct financial advice been received. As the superannuation account is now closed, the compensation amount will be paid directly to you.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 subsection 104-25(1) | Income Tax Assessment Act 1997 paragraph 108-5(1)(b) | Income Tax Assessment Act 1997 section 118-305

Reasons for decision: Summary: 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. Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: • are earned • are expected • are relied upon, and • have an element of periodicity, recurrence or regularity. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income according to ordinary concepts ( FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411). 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 (paragraph 246 of Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts (TR 95/35)). Consequently, the interest component received as part of the compensation payment is assessable as ordinary income. | 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 will be 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, your receipt of the remaining amount of the compensation payment is 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 will end when you accept the compensation payment to settle your claim. In your case, the receipt of the compensation payment is for inappropriate advice which resulted in a financial loss in your superannuation account. The amount paid to you is in satisfaction of the right to seek compensation and the relevant CGT asset is the disposal of the right to seek compensation. 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). Your ownership of the intangible CGT asset will end when you accept the compensation payment to settle your claim. At that time CGT event C2 will happen 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. In this case, the amount you will receive is in relation to your superannuation fund. 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 a right to an allowance, annuity or capital amount payable out of a superannuation fund or an asset of a superannuation fund. It is considered that the compensation received was in relation to such a right and therefore any capital gain or loss is disregarded.