The tax effect of the Royal Commission into financial services

Posted on 22nd February 2019 by Christabelle Harris

As part of their response to the financial services Royal Commission, the ATO has announced guidance over the rules regarding the taxation of compensation paid to individuals due to poor or non-advice from financial institutions.

Taxpayers will need to consider certain tax consequences if they have personally received compensation from a financial institution because they:

• received advice from the institution that was found to be inappropriate, or
• paid for advice that they did not receive.

The tax treatment of the compensation depends on what the compensation is being paid for, and how an investor holds (or held) the investments.

A compensation payment can include:

• compensation for loss on an investment;
• a refund or reimbursement of fees;
• interest.

Compensation for loss on an investment

A taxpayer may receive compensation for a loss amount if the value of their investments is lower than it would have been if they had received appropriate advice. There are different tax treatments depending on whether the compensation relates to investments you have disposed of or existing investments.

If the compensation related to investments you have disposed of, then the compensation can be treated as additional capital proceeds relating to the disposal of those investments. If the compensation relates to investments held for at least 12 months you will still be entitled to the 50% CGT discount.

If the compensation is for investments you still own, you will need to reduce the cost base by the compensation amount received. It may also be necessary to apportion the compensation amount where it relates to more than one investment.

Refund or reimbursement of adviser fees

A compensation payment may include an amount that is a refund or reimbursement of adviser fees. The tax treatment of this amount depends on whether you claimed a deduction for the adviser fees in your tax return.

If a deduction was claimed for the adviser fees in a tax return, the amount received as a refund or reimbursement will form part of your assessable income in the year it was received.

If the advice fee formed part of the cost base of an asset, any refund will reduce the cost base of the asset by the amount refunded.

If there was no deduction claimed for the adviser fees, the refund or reimbursement does not form part of your assessable income  and can therefore be ignored for tax purposes.

Interest component

The interest component is assessable as ordinary income and should be included in your tax return in the financial year it was received.

If you have received compensation from a financial institution it is likely we will need to amend your tax return. Please contact one of our Team on (08) 9316 7000 to discuss your options.