Private ruling: Bank compensation payment
Date of advice: 13 October 2023
Published: 27 November 2023
Ruling period: 1 June 20XXto 30 June 20XX
Date scheme commenced: 1 January 19XX

Ruling: Q1: Is the refund non-assessable non-exempt income of you pursuant to section 301-10? | A1: No. | Q2: Is the interest component of the refund derived by you in your personal capacity? | A2: Yes. | Q3: Is the interest component of the refund assessable to the Individual Taxpayers as ordinary income? | A3: Yes. | Q4: Is the remainder of the refund assessable to you as individuals under the capital gains tax provisions? | A4: Yes. | Q5: If the answer to Question 4 is Yes, will the capital gain on the remainder of the refund be disregarded under section 118-305? | A5: Yes. | Q6: If the answer to questions 3 and/or 4 are "no", is the refund (or any part of it) assessable to you as individuals under any other provision of the ITAA 1997 or the ITAA 1936? | A6: Decline to rule. | Q7: If the answer to questions 3 and/or 4 are "yes", is the refund apportioned between you as individuals based on your respective member entitlements as at the date the fund was wound up? | A7: Yes. | Q8: Does the refund result in a credit and/or debit to your individual transfer balance accounts? | A8: Decline to rule. | Q9: Is the refund assessable to the former trustees of the fund? | A9: Decline to rule.

Relevant facts and circumstances: The Fund was established in 19XX, with you as: (a) Individual trustees; and (b) Members. In 20XX, you signed rollover benefit statements to transfer your respective superannuation entitlements to a super fund. A final tax return and final set of financial statements were completed for the Fund. The Fund was wound up on 20XX. The Fund's ABN was cancelled from 20XX. At the time the Fund was wound up, you were the (a) Individual trustees; and (b) Members. Your bank contacted you to advise that the sum of $XX was refundable to the Fund for: (a) Ongoing advice fees; and (b) Interest. Given that the Fund had been wound up and you were over the age of 65 and had met a condition of release, the bank agreed that it would pay the sum of $XX to your personal joint bank account. You provided payment instructions in 20XX to the bank. The payment instructions stated that you were paid the amount in your capacity as Trustee/Director. The bank paid the payment to your personal joint bank account 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 118-305 | Income Tax Assessment Act 1997 section 301-10 | Income Tax Assessment Act 1997 section 304-10

Reasons for decision: Summary: Is the payment non-assessable non-exempt income of you pursuant to Section 301-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? No. Section 301-10 states that benefits are tax free if you are 60 years or over when you receive a superannuation benefit, the benefit all superannuation is not assessable income and is not exempt income. First we will determine whether the payment received by you could be considered to be a 'superannuation benefit'. For the payment to be a superannuation benefit it must meet the conditions in the table in s. 307-5(1). For payments from a super fund, it would have to meet Item 1. The key criteria a payment needs to meet for that Item to apply, is that it must be paid 'from' a fund because the person was a fund member (if paid during their life). In this case the payment was not paid from the fund. While it may have been paid to the fund if it was still operational, as a question of fact that did not occur. There is no discretion for the Commissioner to make a particular payment a super benefit. In response to your alternative argument (in your application) that if the Commissioner does not consider the payment to be a 'superannuation benefit', you have relied on Section 304-10(5) for Section 304-10 to apply. That provision refers to assets paid from a superannuation plan as being treated as a superannuation benefit. We do not consider that the payment has come from a superannuation plan when it was paid from the bank directly and the fund did not exist at the time the payment was made. Even if a payment was somehow received under Section 304-10(5), for Section 304-10 to apply, it still has to meet the other conditions of Section 304-10(1) (for Super funds). That requires the payment to meet one of the conditions in paragraph 304-10(1)(b) to be met. It is difficult to see how (b)(ii) could be met given both members had met a condition of release with a Nil cashing restriction (reaching age 65), and also we consider that (b)(i) could not be met given the fund did not exist at the time the payment was made. We consider therefore, that the payment could neither be a superannuation benefit, or assessable under Division 304. Is the interest component of the payment derived by you in your personal capacity? Yes. | Detailed Reasoning - Reasoning: In the information you provided, it shows that you have nominated that the payment you received from the bank be paid into your personal bank account which is in both of your names. You were paid the amount of $XX in 20XX into this account. You signed the relevant bank nomination form provided by the bank, confirming that you wanted the payment paid into this account. The super fund had (at that point) been closed and was in pension mode. We are satisfied that this payment has been derived by you in your personal capacities. | Detailed Reasoning - Question 3: Is the interest component of the payment assessable to you as ordinary income? Yes. | 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 ' 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. | Detailed Reasoning - Question 4: Is the remainder of the payment you received subject to the capital gains tax provisions? Yes | 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. | Detailed Reasoning - Question 5: If the answer to Question 4 is yes, will any capital gain on the remainder of the payment be disregarded under section 118-305 (ITAA 1997)? Yes | 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. | Detailed Reasoning - Question 6: If the answer to questions 3 and/or 4 are "no", is the Refund (or any part of it) assessable to you as individuals under any other provision of the ITAA 1997 or the ITAA 1936? | Detailed Reasoning - Reasoning: In Taxation Ruling 2006/11 ' Private Rulings' at paragraph 39 gives situations where the Commissioner may decline to rule where the private ruling would have no practical consequences. This question is considered to fall into this category. | Detailed Reasoning - Question 7: If the answer to questions 3 and/or 4 are "yes", is the payment apportioned between you as individuals based on your respective member entitlements as at the date the fund was wound up? Yes | Detailed Reasoning - Reasoning: We note from your application that each member had different member entitlements at the date the fund was wound up. The principles in Ronpibon Tin N.L and Tongkah Compound N.L v Federal Commissioner of Taxation (1949) 78 CLR 47 require in the context of 'dual purpose expenditure', that expenditure be apportioned between the different purposes on a fair and reasonable basis. In your case, we consider it appropriate that each member should apportion the compensation on a fair and reasonable basis, having regard to their respective superannuation balance. We consider that this would be an acceptable method to apportion the payment. | Detailed Reasoning - Question 8: Does the payment result in a credit and/or debit to your respective transfer balance accounts? | Detailed Reasoning - Reasoning: Taxation Ruling 2006/11 ' Private Rulings' at paragraph 39 gives situations where the Commissioner may decline to rule where the private ruling would have no practical consequences. This question is considered to fall into this category. | Detailed Reasoning - Question 9: Is the payment assessable to the former trustees of the fund? | Detailed Reasoning - Reasoning: Taxation Ruling 2006/11 ' Private Rulings' at paragraph 39 gives situations where the Commissioner may decline to rule where the private ruling would have no practical consequences. This question is considered to fall into this category.