Where a super fund has a right to seek compensation from a financial services provider, the financial service provider may pay to the super fund compensation (in satisfaction of that right) that reflects any of the following:
- an amount corresponding to a loss of value of an investment resulting from deficient advice
- an amount corresponding to a loss of value as a result of a member investing in an inappropriate investment option
- loss of earnings or interest.
In these circumstances, the following income tax, GST and superannuation consequences apply.
Income tax
Compensation for loss of value
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.
Compensation for loss of earning or interest
Compensation for earnings and interest will normally be assessable income to the super fund. However, if a compensation amount received by a super fund for loss of earnings or interest is part of the capital proceeds received in relation to a CGT event involving a CGT asset of the fund (including a right to seek compensation), the amount received will reduce the cost base of any underlying investment.
If the investment has been disposed of, the amount is considered to be additional capital proceeds in relation to any relevant CGT event.
If the trustee determines that the 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.
GST
If a compensation amount received by a super fund includes a component of interest, or compensation for loss of earnings or loss of value on an investment, this component will not be subject to GST. This is because such a payment is not consideration for a supply.
Super contributions
The compensation amount received will not be a super contribution for the benefit of a member of the super fund if the trustee of the super fund allocates an amount to the member's super interest in respect of the compensation. This is because the compensation amount does not result in the capital of the super fund being increased – the right to compensation has been satisfied by the compensation amount.
See also:
- Compensation received by super funds from financial institutions and insurance providers
- Fees where no service provided
- Overcharged insurance premiums
- Interim use of reserves
- Payments where no right to seek compensation
Find out about:
- Compensation paid to individuals for advice from financial institutions
- Taxation Ruling TR 95/35 – Income tax: capital gains: treatment of compensation receipts
- Taxation Ruling TR 2010/1 – Income tax: superannuation contributions
- Disposal – CGT event
- Amending an income tax return
- Goods and Services Taxation Ruling GSTR 2001/4 – GST consequences of court order and out-of-court settlement