Private ruling: Assessable income compensation payment
Published: January 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the payment you received in compensation for inappropriate financial advice, assessable income? | A1: 

Relevant facts and circumstances: In 2004, you received advice from a financial consultant, recommending you borrow a sum of money to invest in a particular investment product. You have made no income from the investment but, have made interest repayments on the borrowed some of money. You have claimed deductions for these interest repayments over the life of the investment. In 2010, you made a complaint to the financial consulting firm regarding the misleading and inappropriate financial advice you received from the consultant in relation to the investment and associated loan arrangement. You received a letter from the financial consulting firm advising that the matter was investigated and it was found that the advisor had provided potentially inappropriate advice to you in relation to this investment. Later in 2010, you signed a deed of release with the financial consulting firm releasing them from any further actions, claims, demands and complaints in relation to the investment in return for a compensation payment. The deed of release stated that the firm agreed to; · pay you a sum of money for interest payments paid from inception of investment until 30 June 2011 · pay you a sum of money for future interest payments from 1 July 2011 to the maturity of the loan arrangement · indemnify you from any other costs payable upon maturity of the loan arrangement and exit from the investment product. The lump sum compensation payment was received in the 2010-11 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 20-20 | Income Tax Assessment Act 1997 Subsection 20-20(2)

Reasons for decision: Summary: The compensation payment you received is assessable income. The payment is considered an assessable recoupment as it was received by way of indemnity and you can claim a deduction, and have claimed a deduction, for the loss or outgoing to which the payment relates. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has generally been held to include three 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 · have an element of periodicity, recurrence or regularity. In your case, you have not earned the lump sum payment as it does not directly relate to services performed by you. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the complaint you made as a result of inappropriate financial advice received from your financial advisor on a particular investment, rather than from any personal services performed. Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. However, the lump sum payment you received was to compensate for expenses you have paid, not for any loss of income. Accordingly, the lump sum payment is not considered ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income also includes statutory income. Statutory income is amounts that are not ordinary income but are included in assessable income by another provision. One such provision is section 20-20 of the ITAA 1997 which deals with assessable recoupments. Subsection 20-20(2) of the ITAA 1997 provides that an amount received by way of insurance or indemnity is an assessable recoupment if: · you can claim a deduction for the loss or outgoing for the current year · have deducted or can deduct an amount for it in an earlier income year. While 'indemnity' has no statutory definition, its ordinary meaning, taken from The Macquarie Dictionary (Multimedia) version 5.0.0,-01/10/01, includes compensation for damage or loss sustained. In your case, you received a lump sum payment from your financial consultant. The payment was in compensation for losses or outgoings you have sustained, and will sustain, in making interest re-payments on the sum of money borrowed to invest in the investment product. You have therefore received an amount by way of indemnity. You have claimed a deduction for the loss or outgoing (the interest re-payments) in earlier income years and, will claim a loss or outgoing (the interest re-payments), in the current income year. Therefore, as you have received an amount by way of indemnity for a loss or outgoing that you have, and will, claim a deduction for, we consider that the settlement payment you received in compensation for inappropriate financial advice is an assessable recoupment under section 20-20 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.