Private ruling: CGT - compensation
Date of advice: 10 November 2023
Published: 8 January 2024
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the interest component you received as part of the compensation payment assessable as ordinary income? | A1: Yes. | Q2: Is the remainder compensation payment you received subject to the capital gains tax provisions? | A2: Yes. | Q3: If the answer to question 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? | A3: Yes.

Relevant facts and circumstances: In the relevant income year you both received correspondence from a financial institution regarding a Self-Managed Superannuation Fund (SMSF) of which you were both members. The correspondence stated that the SMSF paid ongoing Advisor Services Fees to a financial adviser. It was found that the SMSF may not have received the advice services which were paid for. Consequently, a refund of the advice fees, plus interest was being paid as compensation. The SMSF was wound up on 30 June 20XX. Therefore, you both received compensation personally.

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 118-305

Reasons for decision: Summary: Is the interest component you received as part of the compensation payment assessable as ordinary income? | Detailed Reasoning - 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) 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). Consequently, the interest component received as part of the compensation payment is assessable as ordinary income. | Detailed Reasoning - Question 2: Is the remainder of the compensation payment you received subject to the capital gains tax provisions? | Detailed Reasoning - 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. It is not an assessable recoupment to you as you had not paid for the advice fees being refunded and therefore the fees had not been deductible to you. | Detailed Reasoning - Question 3: If the answer to Question 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 - Reasoning: 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. In your case, it is considered that the compensation you received was in relation to such a right and therefore any capital gain or loss is disregarded.