Private ruling: Compensation
Date of advice: 29 May 2025
Published: 28 July 2025
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 under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is the remainder of the compensation payment including the ex-gratia component you received subject to the capital gains tax provisions contained in Part 3-1 of the ITAA 1997? | A2: Yes. | Q3: Will any capital gain on the remainder of the compensation payment be disregarded under section 118-37 of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: On XX/XX/20XX, you became bankrupt. You received an offer from a financial institution to pay compensation for inappropriate lending in relation to financial services. You accepted the compensation in the 20XX-XX income year. The compensation payment resulted from a complaint to Organisation A. The basis of your complaint was that the loans you acquired should not have been provided to you. The total compensation amount was for $XXXX. This amount comprised of interest, an ex-gratia payment for financial loss and an additional amount to cover interest on a previous settlement sum and ongoing interest while a resolution document is prepared and negotiated.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 section 118-37

Reasons for decision: Summary: 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). Consequently, the interest component you received as part of the compensation payment is assessable as ordinary income. 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 contained in Part 3-1 of the ITAA 1997. An exemption is provided under section 118-37 of the ITAA 1997 for any capital gain or loss made from a CGT event happening in relation to any wrong, injury or illness you suffer personally. 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.