Beware a tax bill on your royal commission compensation

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.

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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