Private ruling: Taxation of compensation
Date of advice: 23 April 2026
Published: 13 July 2026
Ruling period: Years ended XXXX to XXXX
Date scheme commenced: XXXX

Ruling: Q1: Is the amount of $X paid to Y under a Deed of Company of Arrangement (DOCA compensation payment) and the $X compensation paid to Y under the Compensation Scheme of Last Resort (CSLR compensation payment) assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is the DOCA compensation payment and the CSLR compensation payment made to Y assessable under the capital gains provisions in Part 3-1 of the ITAA 1997? | A2: Yes. | Q3: If the DOCA payment and the CSLR compensation payment is assessable under the capital gains provisions in Part 3-1 of the ITAA 1997, can the capital gain be discounted by one third under the CGT Discount for superannuation funds under section 115-100 of the ITAA 1997? | A3: Yes. | Q4: Can the outstanding loss to the Fund of $X of unpaid compensation under the AFCA determination be offset against any capital gain as a capital loss under section 102-5 of the ITAA 1997? | A4: No. | Q5: Do the exemptions in either section 118-37 or 118-305 of the ITAA 1997 apply to disregard any capital gains or capital losses that arise in the circumstances covered by Questions 1 to 4? | A5: No.

Relevant facts and circumstances: 1. From XXXX onwards, A and B were the trustees and members of Y a self-managed superannuation fund. 2. Y was a client of Z an advisory firm from XXXX to XXXX, who established Y and were also the administrators of Y. 3. From XXXX, Z encouraged Y to invest in Z-related entities. 4. Following the voluntary administration of Z and the takeover of the administration of Y by another entity, the assets of Y were liquidated and in XXXX rolled over into a superannuation account for each trustee. 5. Y was not closed. 6. Z entered voluntary administration on XXXX and a Deed of Company Arrangement on XXXX to manage creditor claims, and an amount of $X was paid to Y. 7. The trustees of Y sought compensation for deficient financial advice received from Z for the period of XXXX to XXXX by making a complaint to the Australian Financial Complaints Authority (AFCA). 8. On XXXX the AFCA (Australian financial complaints authority) issued a determination letter stating that the financial advice was not appropriate and outlining the required compensation for the advice received. 9. AFCA considered that appropriate advice would have led to greater investment diversification, providing lower exposure to market volatility and lower risk of capital loss. 10. AFCA calculated the loss for Y for the period of XXXX to XXXX using a 'but for' analysis to determine how much better off Y would have been if appropriate advice had been received. 11. AFCA ordered Z to pay Y the determination amount of $X and an amount of interest of $X, totalling $X. 12. Z did not pay any compensation to Y. 13. Y then applied for compensation through the Compensation Scheme of Last Resort (CSLR), which offers compensation payments where complainants have been unable to obtain compensation from the advisory firm. 14. Compensation payments from CSLR are capped at $X per individual. 15. On XXXX, Y was awarded the maximum compensation of $X. 16. The Notice of Compensation dated XXXX also contains a compensation calculation table which specifically states that the CSLR compensation is calculated with reference to the AFCA determination amount. 17. The table then shows how the $X sum was reached, with reference to the AFCA determination amount ($X), plus interest ($X) and less payments received (DOCA compensation payment), amounting to an AFCA determination amount outstanding ($X), which is then capped at $X. 18. There are now no assets in Y. 19. The trustees of Y sought confirmation from the CSLR on whether there were component parts to the CSLR determination amount or whether the amount was just a capped amount solely related to the amount of the loss suffered by the Fund as assessed by the AFCA. The CSLR responded to their query to advise that the payment is solely towards the AFCA award.

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 102-5 | Income Tax Assessment Act 1997 section 104-20 | Income Tax Assessment Act 1997 section 115-100 | Income Tax Assessment Act 1997 section 116-20 | Income Tax Assessment Act 1997 section 116-45 | Income Tax Assessment Act 1997 section 118-37 | Income Tax Assessment Act 1997 section 118-305

Reasons for decision: Summary: The DOCA compensation payment and the CSLR compensation payment is not assessable as ordinary income. However both payments are subject to the capital gains provisions, with CGT event C1 occurring for both payments and the right to seek compensation as the relevant CGT asset. The CGT discount is also applicable as the relevant asset, the right to seek compensation, has been held for 12 months or more. The outstanding loss to Y of $X of unpaid compensation is not a CGT asset that can be used to generate a capital loss. Instead, the entire AFCA order amount is declared as capital proceeds and those capital proceeds are then reduced by the unpaid amount. The capital proceeds (as previously reduced) are then increased by the DOCA compensation payment and the CSLR compensation payment. An exemption from CGT does not apply in this circumstance. | Detailed Reasoning - Are the compensation payments taxed as ordinary income or capital gains?: 1. An amount received that is ordinary income is included in assessable income under section 6-5 of the ITAA 1997 whereas an amount that is capital in nature is generally subject to CGT under Part 3-1 of the ITAA 1997. 2. The ATO's view on when a lump sum compensation payment is assessable as ordinary income is contained in Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? For compensation payments that are capital, rather than income, in nature, the CGT consequences are discussed in Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts . 3. The ATO has applied the general principles set out in those 2 documents to the situation where a super fund receives compensation for deficient financial advice. The ATO's position on that situation is set out in our fact sheet Deficient financial advice which can be accessed on our webpage ato.gov.au by searching for 'QC 59708'. It advises that: • The compensation is subject to CGT rather than being assessable as ordinary income. • If the compensation received relates to a loss of value on an investment in respect of a capital asset that the super fund still owns, the super fund must reduce either its cost base or reduced cost base by the amount of compensation. • If the compensation amount relates to a loss of value on an investment in respect of a capital asset that the super fund has disposed of, the payment of compensation to the super fund would constitute additional capital proceeds in respect of the relevant CGT event. The super fund would need to amend its income tax return where the disposal happened in a previous income year. • If the trustee determines that the compensation amount cannot be attributed to any particular asset(s) of the fund, the compensation amount will be capital proceeds for the ending of the right to seek compensation. • The super fund may be eligible to apply the CGT discount if the asset has been held for 12 months or longer. 4. Having regard to the above principles for this case, the DOCA compensation payment and the CSLR compensation payment is subject to the capital gains provisions in Part 3-1 of the ITAA 1997 rather than being assessable as ordinary income. CGT event C1 occurs in both these circumstances under section 104-20 of the ITAA 1997. 5. From the documentation provided, the compensation can be attributed to Y's right to seek compensation as the relevant CGT asset. 6. Although in this case the compensation was paid by CSLR rather than Z due to Y not being able to obtain payment from Z, this is not considered to alter the tax consequences. | Detailed Reasoning - CGT Discount: 7. Y may apply the CGT discount for superannuation funds as the relevant CGT asset, the right to seek compensation, has been held for 12 months or more under section 115-100 of the ITAA 1997. The Fund acquired the right to seek compensation at the time of the compensable wrong or injury. | Detailed Reasoning - Outstanding loss: 8. The outstanding loss to Y of $X of unpaid compensation (the original AFCA order of $X less the DOCA compensation payment of $X less the CSLR compensation payment of $X) cannot be offset against any capital gain as a capital loss under section 102-5 of the ITAA 1997. 9. For the income year where the AFCA award was made, CGT event C1 would occur under section 104-20 of the ITAA 1997, with the capital proceeds for that event being 'the amount of any money which the taxpayer has received, or is entitled to receive, in respect of the event, under section 116-20 of the ITAA 1997. In this case, the capital proceeds would be for the entire amount ordered to be paid under the AFCA order. 10. As Y is not likely to receive this entire amount of the capital proceeds from the CGT event, then the capital proceeds are reduced by the unpaid amount of $X under the non-receipt rule in section 116-45 of the ITAA 1997 as: • The likely non-receipt of the whole or part of the capital proceeds is not because of anything done, or omitted to be done, by the taxpayer or by an associate of the taxpayer; and • The taxpayer took all reasonable steps to get the unpaid amount paid. 11. Where the capital proceeds have been reduced under section 116-45 of the ITAA 1997 and Y subsequently has received a part of the amount of the reduction (as has occurred here with the DOCA compensation payment and the CSLR compensation payment), then the capital proceeds (as previously reduced) are increased by that part under subsection 116-45(2) of the ITAA 1997). 12. The capital gains provisions apply to the debt owed to Y for the unpaid amount as if it were not a CGT asset under subsection 116-45(3) of the ITAA 1997. This means that Y cannot get both a reduction in capital proceeds for the unpaid amount and also a capital loss for the disposal of the debt. 13. Y will need to amend its income tax return for the relevant income year to reduce the capital proceeds accordingly by the unpaid amount. | Detailed Reasoning - Section 118-37 exemption: 14. Paragraph 118-37(1)(a) of the ITAA 1997 provides an exemption to disregard a capital gain or loss from a CGT event relating directly to compensation or damages that a taxpayer receives for any wrong or injury suffered by the taxpayer in the taxpayer's occupation or for any wrong, injury or illness the taxpayer or a relative of the taxpayer suffers personally. 15. Paragraph 118-37(1)(b) of the ITAA 1997 extends this exemption to disregard a capital gain or loss made from a CGT event relating to compensation or damages a taxpayer receives as the trustee of a trust (other than a trust that is a complying superannuation entity) for any wrong or injury a beneficiary of the trust suffers in their occupation, or any wrong, injury or illness the beneficiary, or the beneficiary's relative, suffers personally. 16. In this case, the compensation was paid to the trustees of Y for deficient advice provided to Y in relation to investments held by Y. The compensation was not then paid to the trustees on behalf of a beneficiary who suffered a wrong or injury in their occupation, or a wrong, injury or illness they suffered personally. Instead, the compensation was paid for the diminution in value of the assets of Y which resulted from the deficient advice that was provided. Y is also a complying superannuation fund for tax purposes. For both these reasons, paragraph 118-37(1)(b) applies to deny an exemption under section 118-37 of the ITAA 1997 in this case. | Detailed Reasoning - Section 118-305 exemption: 17. Section 118-305 of the ITAA 1997 provides an exemption to disregard a capital gain or loss for a CGT event happening in relation to superannuation in certain circumstances. 18. However, paragraph 118-305(2)(a) of the ITAA 1997 states that the exemption is not available to the trustee of a super fund where the CGT event happens in relation to a CGT asset of the fund. 19. In this case, the compensation was received by the trustees of Y for deficient advice provided to Y in relation to investments held by Y. The compensation can be attributed to Y's right to seek compensation as the relevant CGT asset. Consequently, paragraph 118-305(2)(a) of the ITAA 1997 applies to deny an exemption under section 118-305 of the ITAA 1997 in this case.