Compensation from your bank or financial institution – is it taxable?
Unfortunately our financial institutions have not always acted as ethically as we consumers would like.
Whether you’ve received bad advice or paid for advice you didn’t receive at all, our supervisory and regulatory bodies have sought not only to improve the system so it won’t happen again, but also to ensure that if you are on the receiving end of such bad behaviour, you could be entitled to receive financial restitution.
If you’ve recently received a compensation payment, you might be wondering whether you need to pay tax on it.
The answer is – it depends!
It depends on how your investment was held (1) and the type of compensation you received.
For example, if you’ve disposed of the investment and previously reported a capital gain in your income tax return, your compensation payment increases the capital gain (you may be able to claim the 50% discount too if you held the investment for more than 12 months). You may need to amend your income tax return to include this additional capital gain.
If you haven’t yet disposed of the investment, and you hold it as a capital investment 1 , then the compensation payment reduces its cost for when you do dispose of it in the future (make sure keep details of the compensation payment with your tax records to provide to TNR later).
Where your compensation payment includes an amount that is a refund or reimbursement of adviser fees, and these fees were previously claimed a tax deduction by you, then the amount you received as a refund or reimbursement will generally be taxable to you in the income year you receive it. Similarly, any part of the payment that represents interest should also be included in your tax return in the year you receive it.
If you’ve received an amount of compensation and not sure whether it is taxable, or if you need to amend a prior year tax return for a payment you received, please reach out to TNR.
(1) Note the tax treatment described may be different if a compensation payment relates to an investment that is held on trust, as a revenue asset, or received by a business or superannuation fund.
Important: The information contained in this post / article is not advice. Readers should not act solely on the basis of material contained in this post. Items herein are general comments only and do not constitute or convey advice per se. We recommend that our formal advice be sought before acting on anything contained in this post.
