Private ruling: Compensation - interest and assessable income
Date of advice: 21 April 2026
Published: 13 July 2026
Ruling period: Year ended 30 June 20YY | Year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Is the interest component you received as part of the compensation payment assessable as ordinary income? | A1: Yes. | Q2: Is any capital gain or loss you make due to receiving your share of the compensatory amount disregarded? | A2: No.

Relevant facts and circumstances: Between DD MM 20YY and DD MM 20YY, you received financial advice from a financial services subsidiary of an Australian bank regarding property investments. On DD MM 202YY the bank wrote to you advising the outcome of an investigation and remediation into the financial advice provided to you on behalf of its financial services subsidiary and considered you had not received appropriate advice. The bank's assessment offered you an amount of compensation for losses incurred relating to the relevant property investment. The compensation payment was made with the intention to place you in the financial position you would have been had the advice you received been appropriate. On DD MM 20YY you received an amount of $xxx.xx in relation to an investment property located at xx xx, xx, purchased on DD MM 20YY as tenants in common on a 50:50 basis with the other co-owner. The amount you received was 50% of the total compensation the bank paid in relation to the investment property with the other 50% being received by the other co-owner. The investment property was sold with the sale contract being entered into in the 20YY-YY income year. You attempted to have an independent review of the assessment outcome but received no response from your inquiry. The compensation amount you received was calculated as: • Financial loss compensation: $xxx.xx including a 'Tax gross-up' amount of $xxx.xx which was an additional amount paid to take into account that the compensation would be taxed • Compensatory interest: $xxx.xx The amount of $xxx.xx was paid directly to your personal bank account.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10

Reasons for decision: Detailed Reasoning - Ordinary income: 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)). | Detailed Reasoning - Application to your circumstances: Consequently, the interest component you received as part of the compensation payment is assessable under section 6-5 of the ITAA 1997 as ordinary income. This amount must be declared in your tax return in the income year when received by you. | Detailed Reasoning - Statutory income: Amounts that are not ordinary income but are included in your assessable income by another provision are called statutory income (section 6-10 of the ITAA 1997). Capital gains are included as assessable income under section 102-5 of the ITAA 1997. You make a capital gain or capital loss as a result of a capital gains tax (CGT) event happening (section 102-20 of the ITAA 1997). For most CGT events, your capital gain or loss is the difference between your capital proceeds and the cost base or reduced cost base of your CGT asset. CGT event A1 in section 104-10 of the ITAA 1997 happens if you dispose a CGT asset, or your ownership interest in a CGT asset. The time of the event is when you enter into the contract for the disposal. You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts discusses the CGT implications for compensation receipts. Paragraph 70 of TR 95/35 provides that in determining the most relevant asset in respect of which the compensation has been received, it is often appropriate to adopt a 'look-through' approach to the transaction which generates the compensation receipt. It also states that we regard this concept as the most appropriate basis on which to determine whether any capital gain arises on the disposal of any asset of the taxpayer. The 'look-through' approach is defined in paragraph 3 of TR 95/35 as follows: The 'look-through' approach is the process of identifying the most relevant asset. It requires an analysis of all of the possible assets of the taxpayer in order to determine the asset to which the compensation amount is most directly related. It is also referred to in this Ruling as the underlying asset approach. 'Underlying asset' is also defined in paragraph 3 of TR 95/35 as follows: The underlying asset is the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity. Where the underlying asset for which the compensation relates has been disposed of, the compensation is considered to be additional capital proceeds for the disposal. TR 95/35 also states that a component of the compensation to cover tax that may arise in respect of the compensation receipt also forms part of the additional capital proceeds for the disposal of the underlying asset. | Detailed Reasoning - Application to your situation: In this case the underlying asset that the compensation relates to is the investment property. Therefore, apart from the interest component, the remainder of the compensation payment you received in relation to the investment property constitutes additional capital proceeds from the disposal of your investment property. The sale of the asset was not an involuntary disposal. Therefore, CGT event A1 happened when the asset was disposed of in the 20YY-YY income year. There is no CGT exemption that applies in your situation to disregard any capital gain that results from receiving the compensation.