Beware a tax bill on your royal commission compensation


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Since the recent banking royal commission, there has been a spike in compensation payments paid to investors by financial institutions.

But did you know that these payments could be taxable?

The way tax law applies to such payments is complicated because different treatments apply to different types of compensation.

big four banks reporting season profit shares

For example, compensation for lost interest will be taxable (on the basis that the interest - if you'd received it - would have been taxable).

Compensation for fees paid to advisers who gave dodgy advice would be taxable if you claimed a tax deduction for the original fees.

Compensation for an investment that you have since sold will need to be added to the sale proceeds, which could involve extra capital gains tax and amending a previously lodged tax return.

The best guidance is to seek advice.

Not only do different tax treatments apply to different payments, many people will also receive compensation for more than one fault.

In that case, they need to be able to split out the different elements and work out the different tax treatments.

So talk to a tax adviser and keep detailed paperwork identifying exactly what you are being paid out for.

If the payout is taxable, you may be able to claim a deduction for any fees you incurred in getting it (such as legal fees).

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Mark Chapman is director of tax communications at H&R Block, Australia's largest firm of tax accountants, and is a regular contributor to Money. Mark is a Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales. Previously, he was a tax adviser for over 20 years, specialising in individual and small business tax, in both the UK and Australia. As well as operating his own private practice, Mark spent seven years as a Senior Director with the Australian Taxation Office. He is the author of Life and Taxes: A Look at Life Through Tax.
Pete Zhar
November 15, 2019 11.32am

What an absolute disgrace. You've already been let down by your adviser and then the ATO wants a slice of the compensation? Come on.

Money magazine
November 15, 2019 11.34am

Thanks for your comment, Pete.

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