Private ruling: Subject CGT – compensation for incorrect information provided
Date of advice: 3 September 2018
Published: October 2018
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the lump sum payment you received classified as an Eligible Termination payment (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is the lump sum payment you received classified as a superannuation benefit in accordance with section 307-5 of the ITAA 1997? | A2: No. | Q3: Is the lump sum payment assessable as ordinary income? | A3: No. | Q4: Is the lump sum payment assessable under the capital gains tax (CGT) provisions? | A4: Yes. | Q5: Do any CGT exemptions apply? | A5: No.


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 104-25 | 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 118-37 | Income Tax Assessment Act 1997 Paragraph 118-37(1)(a) | Income Tax Assessment Act 1997 Section 118-305 | Income Tax Assessment Act 1997 Section 82-130 | Income Tax Assessment Act 1997 Section 307-5 Question 1: | Is the lump sum payment you received classified as an Eligible Termination payment (ETP) under section 82-130 of the ITAA 1997? | Summary | The lump sum payment received by you is not deemed to be an ETP under section 82-130 of the ITAA 1997 because as there is a weak nexus between the receipt of the payment and termination of your employment, this payment is not deemed to be received ‘in consequence of’ the termination of your employment. | Detailed reasoning | For a payment to be considered an ETP under section 82-130 of the ITAA 1997, it would need to satisfy the definition of an ETP and the associated criteria set out in subsection 82-130(1) of the ITAA 1997. | Subsection 82-130(1) of the ITAA 1997 states that a payment is considered an employment termination payment if: | (a) it is received by you: | i. in consequence of the termination of your employment; or | ii. after another person’s death, in consequence of the termination of the other person’s employment; and | (b) it is received no later than 12 months after termination (except for situations mentioned in subsection (4)); and | (c) it is not a payment mentioned in section 82-135. | Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase ‘in consequence of’ explains what is meant by the phrase ‘in consequence of the termination of any employment’. | Paragraph 6 of TR 2003/13 states that the phrase ‘in consequence of’ requires a connection between the termination and the payment, although the termination may not need to be the dominant cause. | Paragraphs 31 and 32 of TR 2003/13 refer to how payments arising from litigation settlements can be made in consequence of termination of employment. By applying these paragraphs to your circumstances, we can state that the nexus between the payment you received from the trustee of your superannuation fund, and the termination of your employment appears to be quite remote. This is because this payment arose as a result of an act of negligence which was not made by your employer, but rather from your superannuation fund, by incorrectly calculating the redundancy benefit estimate which you then relied upon to express formal interest in voluntary redundancy and ultimately becoming redundant from XX/XX 20XX. | Hence, we can conclude that since there is a weak nexus between the receipt of the compensation payment and the termination of your employment, we can state that this payment is not classified as ETP as it doesn’t satisfy paragraph 82-130(1)(a) of the ITAA 1997 and ultimately section 82-130 of the ITAA 1997. | Question 2 | Is the lump sum payment you received classified as a superannuation benefit in accordance with section 307-5 of the ITAA 1997? | Summary | As the payment of this lump sum was not made from your superannuation fund, but rather by the entity that is the trustee of this superannuation fund, it would not be considered a payment mentioned in subsection 307-5(1) of the ITAA 1997. As it is not a payment mentioned in subsection 307-5(1) of the ITAA 1997, the payment you received would not be classified as a superannuation benefit in accordance with section 307-5 of the ITAA 1997. | Detailed reasoning | Subsection 307-5 (1) of the ITAA 1997 defines a superannuation benefit as a payment described in the following table. | Types of superannuation benefits | Item | Column 1 | Superannuation benefit type | Column 2 | Superannuation member benefit | Column 3 | Superannuation death benefit | 1 | superannuation fund payment | A payment to you from a *superannuation fund because you are a fund member. | A payment to you from a superannuation fund, after another person's death, because the other person was a fund member. | 2 | RSA payment | A payment to you from an *RSA because you are the holder of the RSA. | A payment to you from an RSA, after another person's death, because the other person was the holder of the RSA. | 3 | approved deposit fund payment | A payment to you from an *approved deposit fund because you are a depositor with the fund. | A payment to you from an approved deposit fund after another person's death, because the other person was a depositor with the fund. | 4 | small superannuation account payment | A payment to you under section 63, 64, 65, 66, 67 or 67A, or subsection 76(6), of the Small Superannuation Accounts Act 1995 . | (These provisions authorise payment of money held under the Act.) | A payment to you under section 68 or subsection 76(7) of the Small Superannuation Accounts Act 1995 . | (These provisions authorise payment of money held under the Act to the legal personal representative of the deceased.) 5 | unclaimed money payment | A payment to you: | (a) under subsection 17(1), (2) or (2AB) , 20F(1) or 20H(2), (2AA) or (2A), section 24E or subsection 24G(2) or (3A) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 ; or | (b) as mentioned in subsection 18(4) or (5) of that Act; otherwise than because of another person's death . | A payment to you: | (a) under subsection 17(1), (2), (2AB) or (2AC), 20H(2), (2AA), (2A) or (3) or 24G(2), (3A) or (3B) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 ; or | (b) as mentioned in subsection 18(4) or (5) of that Act; because of another person's death. | 6 | superannuation co-contribution benefit payment | A payment to you under paragraph 15(1)(c) of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 . | A payment to you under paragraph 15(1)(d) of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 . 7 | superannuation guarantee payment | A payment to you under section 65A or 66 of the Superannuation Guarantee (Administration) Act 1992 . | (This provides for money collected under the Act to be paid to a person who retires because of incapacity or invalidity.) | A payment to you under section 67 of the Superannuation Guarantee (Administration) Act 1992 . | (This provides for money collected under the Act to be paid to the legal personal representative of the deceased.) 8 | superannuation annuity payment | A payment to you: | (a) from a *superannuation annuity; or | (b) arising from the commutation of a superannuation annuity; | because you are the annuitant. | A payment to you: | (a) from a superannuation annuity; or | (b) arising from the commutation of a superannuation annuity; | because of the death of the annuitant. | Subsection 307-5 (2) of the ITAA 1997 defines a superannuation member benefit as a payment described in column 2 of the table. | Subsection 307-5 (3) of the ITAA 1997 states that a superannuation benefit is also a superannuation member benefit if: | (a) the superannuation benefit arises from the commutation of a * superannuation income stream; and | (b) it would be a * superannuation death benefit apart from this subsection; and | (c) the benefit is paid after the latest of the following: | (i) 6 months after the death of the deceased person; | (ii) 3 months after the grant of probate of that deceased person's will or letters of administration of that deceased person's estate; | (iii) if the payment of the benefit is delayed because of legal action about entitlement to the benefit--6 months after the legal action ceases; | (iv) if the payment of the benefit is delayed because of reasonable delays in the process of identifying and making initial contact with potential recipients of the benefit--6 months after that process is completed; and | (d) the Commissioner has not made a decision about the benefit under subsection (3A). | Based on the information you provided to us on XX/XX/ 20XX in relation to the circumstances surrounding the payment you received on XX/XX/ 20XX of $XXX,XXX, this payment was not actually made by superannuation fund, but rather by the entity that is the trustee of the superannuation fund. | As this payment was not made from the superannuation fund but rather by the trustee of the superannuation fund, the payment you received is not a superannuation benefit in accordance with section 307-5 of the ITAA 1997. This is because the payment received by you is not a category of superannuation payment mentioned in subsection 307-5(1) of the ITAA 1997. | Question 3 | Is the lump sum payment regarded as ordinary assessable income? | Summary | The lump sum payment does not have the characteristics of income according to ordinary concepts and therefore is not assessable as ordinary income under section 6-5 of the ITAA 1997. | Detailed reasoning | Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). | Based on case law, it can be said that ordinary income generally includes receipts that are earned, expected, relied upon, and have an element of periodicity, recurrence or regularity. | In your situation you have accepted a settlement payment as a result of incorrect information being provided to you regarding final payment of a superannuation benefit as a result of accepting a voluntary redundancy. The payment is not earned by you as it does not relate to services performed or to your employment duties with your previous employer. | The payment is also a one off payment and thus it does not have an element of recurrence or regularity. | Although the settlement payment was calculated taking into account in part the wages you didn’t have the opportunity to earn, this does not mean that the payment has the character of income. | Considering the full circumstances, the payment is not regarded as ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997. | Question 4 | Is the lump sum payment assessable under the capital gains tax (CGT) provisions? | Summary | The lump sum payment received is considered to be capital in nature and assessable under the capital gains tax provisions as capital proceeds from the disposal of your right to seek compensation. | Detailed reasoning | 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. | 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. | Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts discusses the capital gains tax implications for compensation receipts. | Why the payment was made is an important factor in determining whether an asset has been disposed of for capital gains tax 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. | The transaction which generated your compensation receipt is as a result of the actions undertaken by the PSS who provided negligent financial advice to you on XX/XX/20XX which you queried on XX/XX/20XX. The relevant CGT asset in your case is the right to seek compensation. The payment received was in full settlement of the claims made. | Your right to seek compensation is an intangible CGT asset (acquired at the time your superannuation fund provided the incorrect advice) and your ownership of that asset ended when you accepted the lump sum to settle your claim. At that time CGT event C2 happened. 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). In your case, the lump sum payment represents capital proceeds for your CGT C2 event. | Question 5 | Do any CGT exemptions apply? | Summary | The Commissioner does not consider that any part of the capital gain can be disregarded as the exemptions contained in sections 118-37 and 118-305 of the ITAA 1997 do not apply. | Detailed reasoning | The CGT exemptions that require consideration in this case are those provided by paragraph 118-37(1)(a) and section 118-305 of the ITAA 1997. | Under paragraph 118-37(1)(a) of the ITAA 1997 a capital gain is disregarded if it is compensation or damages you receive for: | (i) any wrong or injury you suffer in your occupation; or | (ii) any wrong, injury or illness you or your relative suffers personally. | Wrong you suffer personally | Subsection 160ZB(1) of the Income Tax Assessment Act 1936 (ITAA 1936) which was re-written as paragraph 118-37(1)(a) of the ITAA 1997 sheds light on what is meant by a wrong you suffer personally. | Subsection 160ZB(1) of the ITAA 1936 stated: | A capital gain shall not be taken to have accrued to a taxpayer by reason of the taxpayer having obtained a sum by way of compensation or damages for any wrong or injury suffered by the taxpayer to his or her person or in his or her profession or vocation and no such wrong or injury, or proceeding instituted or other act done or transaction entered into by the taxpayer in respect of such a wrong or injury, shall be taken to have resulted in the taxpayer having incurred a capital loss. | (emphasis added) | Subsection 1-3(2) of the ITAA 1997 states that where the 1936 Act expressed an idea in a particular form of words and the 1997 Act appears to have expressed the same idea in a different form of words in order to use a clearer or simpler style, the ideas are not be taken to be different just because different forms of words were used. | There is nothing in an Explanatory Memorandum or any other extrinsic material in relation to the remaking of subsection 160ZB(1) of the ITAA 1936 into paragraph 118-37(1)(a) of the ITAA 1997 that indicates that the meaning or effect of the new provision was to be any different to the old provision. | Therefore, it is considered that a wrong suffered personally by a taxpayer means a wrong suffered ‘to his or her person’. | The following principles of statutory interpretation are also relevant in considering the meaning of a wrong suffered personally: | ● The noscitur a sociis rule states that a meaning of a word is derived from its context. For example, in the expression ‘house, office, room or place’ the word ‘place’ does not include a public lane. | ● The ejusdem generis rule states that general matters are constrained by reference to specific matters. For example, ‘a railway, road, pipeline or other facility’ does not include a storage facility ( Canwan Coals Pty Ltd v. Federal Commissioner of Taxation (1974) 1 NSWLR 728). | Negligence is a tort so is a legal wrong. It is a failure to take reasonable care to avoid causing a loss or injury to another person. | Therefore, it could be argued that the negligence by your superannuation fund in providing incorrect information was a wrong that you suffered personally. | However, the meaning of ‘wrong’ must be considered in the context of the words around it which are ‘injury’ and ‘illness’ in relation to paragraph 118-37(1)(a) of the ITAA 1997 and ‘injury suffered by the taxpayer to his or her person’ in relation to subsection 160ZB(1) of the ITAA 1936. | Taking into account this context, it is considered a wrong suffered personally for the purposes of paragraph 118-37(1)(a) of the ITAA 1997 would include, for example, defamation, as this is a wrong suffered by the taxpayer to his or her person but would not include negligence that causes financial loss as unlike defamation, injury or illness, it is not a wrong suffered by a taxpayer to his or her person. | This interpretation is supported by TR 95/35 which contains two examples that deal with compensation for negligence that resulted in financial loss (examples 8 and 28). In example 8, the taxpayer was assessed on the compensation as a capital gain on the disposal of their right to seek compensation and no CGT exemptions (including subsection 160ZB(1) of the ITAA 1936/paragraph 118-37(1)(a) of the ITAA 1997) were considered to apply. | In example 28, the end result was that there was no capital gain but this was because of reasons other than the exemption provided for by subsection 160ZB(1) of the ITAA 1936/paragraph 118-37(1)(a) of the ITAA 1997. It is noteworthy that in the discussion of the CGT consequences in this example there is no mention of that exemption. If that exemption applied to compensation for negligence that results in financial loss, then it is considered that the exemption would have been discussed. | Therefore, it is not considered that the negligence by your superannuation fund that caused you financial loss is a wrong you suffered personally for the purposes of exemption under subparagraph 118-37(1)(a)(ii) of the ITAA 1997. | Wrong you suffer in your occupation | The Commissioner states in TR 95/35 that the exemption under subsection 160ZB(1) of the ITAA 1936/paragraph 118-37(1)(a) of the ITAA 1997 will only apply where an individual receives compensation for a wrong or injury suffered to his or her person or in his or his occupation, profession or vocation. | Whilst at paragraph 214 of TR 95/35 it states that the terms ‘to his or her person’ and ‘in his or her vocation’ should be read as widely as possible, the intention of the ‘wide’ interpretation was to cover the full range of employment and professional type claims; for example to include claims for discrimination, harassment, victimisation, wrongful dismissal, and defamation as well as personal injury or illness. | The negligent provision of incorrect information by your superannuation fund that you suffered is very different to wrongs such as discrimination, harassment, victimisation, wrongful dismissal and defamation which a person can suffer ‘in’ their occupation, profession or vocation. Although there is an indirect connection to your occupation, it is considered that the negligent provision of incorrect information by your superannuation fund is not a wrong that you suffered ‘in’ your occupation. | Superannuation | Section 118-305 of the ITAA 1997 provides an exemption for CGT events that happen in relation to: | (a) a right to an allowance, annuity or capital amount payable out of a *superannuation fund or *approved deposit fund; | (b) a right to an asset of such a fund; | (c) a right to any part of such an allowance, annuity, capital amount or asset. | Part of the settlement amount took into account the fact that due to the superannuation fund’s negligent advice, you did not have the opportunity to increase your superannuation entitlement. However, this does not mean that you had a right to any amount payable out of your superannuation fund. This is supported by the fact that the settlement amount was not paid out of your superannuation fund but rather by the trustee of the superannuation fund. Therefore, it is not considered that section 118-305 of the ITAA 1997 applies in your case. | Additional information | As the CGT event (your disposal of the right to seek compensation) happened less than 12 months after you acquired that right (when the negligent advice was provided), you are not able to apply the 50% general discount.


Relevant facts: You were employed with a government department (the employer) for a number of years. | Your employer offered you a voluntary redundancy. | Your employer provided you with an estimate for an ETP pay out and your superannuation fund provided you with a redundancy benefit estimate (superannuation benefit). | The superannuation benefit estimate was for a gross lump sum of $XXX,XXX. | You queried the superannuation estimate as the amount provided appeared too high. | You were advised by the superannuation fund the amount was correct. | You accepted the voluntary redundancy. | You were paid a superannuation benefit of $XXX,XXX by the superannuation fund. | The amount paid by the superannuation fund was substantially less than the estimate provided by the superannuation fund. | You lodged a formal complaint against the superannuation fund for negligence. | The entity that was the trustee of the superannuation fund (trustee) made a settlement offer to settle your claim of negligent misstatement as a result of incorrect information provided by the fund. You claimed the incorrect information caused you to accept a voluntary redundancy which you would not have done if the advice initially provided was correct and this has resulted in you suffering a financial loss. | In the trustee’s letter offering the settlement, it stated that: | ● The trustee accepts that had the superannuation benefit estimate been correct, you would not have accepted a redundancy and would have continued working. | ● The loss you suffered was the loss of the chance to continue working, earn income and contribute to the fund so that you could retire with a greater superannuation benefit. | ● You contend that had you received correct advice regarding your redundancy benefit, you would have continued to work until you had accrued a sufficient total benefit in the superannuation fund to pay off the balance of your home loan ($XXX,XXX as at XX/20XX), plus pay for $XX,XXX home repairs and have $XX,XXX in cash saved for contingencies. | ● The trustee considers that it was open for a court to determine that you would have worked an additional X years to pay off your mortgage, pay for home repairs and save the cash contingency of $XX,XXX. | ● Taking that into account the trustee considers that you had lost the chance to earn wages of $XXX,XXX and to increase your superannuation entitlement by $XX,XXX. | ● Consequently, the trustee considers that a reasonable offer of settlement is $XXX,XXX. | You accepted the settlement offer. | The payment is a one off payment in full and final settlement of your claim. | The lump sum payment was not paid out of the superannuation fund; rather it was paid by the trustee.