The washup from the Banking Royal Commission


Written by Bob Deutsch, CTA, Senior Tax Counsel

The washup from the Banking Royal Commission conducted last year has resulted in a number of compensation and related payments being made by the big 4 banks (CBA, ANZ, WBC, and NAB) and AMP (“the big 5”) in relation to a number of matters. These include compensation for: 
  • inappropriate advice being provided to roll over certain existing largely satisfactory superannuation arrangements to superannuation arrangements with one or more of the big 5;
  • inappropriate advice being given in relation to having superannuation guarantee contributions paid into a potentially inappropriate account with one or more of the big 5;
  • inappropriate advice being given in relation to insurance arrangements concerning total or permanent disability with one or more of the big 5, in particular where the level and nature of the cover was inappropriate to the circumstances of the customer;
  • inappropriate advice being given in relation to salary continuance arrangements with one or more of the big 5, where again the nature and extent of the coverage was inappropriate to the circumstances of the particular customer; 
  • fees incurred by customers and paid to one or more of the big 5 for services which they never received. Some 200,000 customers have been identified as having been caught up in this scandal. The total compensation is believed to be in the region of some $180 million. 
Bob Deutsch, CTA
In addition there are refunds being paid to superannuation customers who lost money on their retirement savings because their cash investments were eroded by what is now agreed to be excessive fees and charges paid to one or more of the big 5. 

Leaving to one side the outrage that has accompanied the exposure of all this, it raises some interesting questions, particularly in the context of how payments received by affected customers are to be treated for tax purposes. 

Anecdotally, I am hearing that some refunds are being paid directly to superannuation funds, while others are being paid to individual customers, and there does not necessarily appear to be any particular logic for the way in which this is being done. 

Related to that, but perhaps more importantly, is the question of whether the amounts received are assessable in the hands of the recipient. 

The general principle which has been applied in relation to compensation payments in the past is that, if the payment being compensated is for an amount that, if it had been received in the normal course, would be assessable, the compensation payment itself is assessable.

Thus, from the decision of the High Court in FCT v Dixon (1952) 86 CLR 540 an amount paid as compensatory damages was held to generally acquire the character of that for which it is substituted; Thus, it would seem compensation payments which are a substitute for income are themselves income according to ordinary concepts, even if they are received as a lump sum. 

In addition, amounts in the form of compensation damages may be subject to assessment under the capital gains tax provisions with some exceptions –see s 118-37 ITAA 1997. 

These principles, while workable in many contexts, may be difficult to apply with any consistency or rigour in the context of these significant compensation payments being paid by the big 5. 

Other issues also occur to me in particular: 
  • If paid to a superannuation fund how is it to be treated by the fund – if it is a non-concessional contribution (“NCC”) will it be counted for NCC cap purposes; 
  • If a fee was paid to one of the big 5 and claimed as a tax deduction when refunded does it become assessable income to the taxpayer – see s 20-10 ITAA 1997 ff. 
Perhaps surprisingly, there is no class ruling in relation to any of this, nor indeed any form of ruling from the Tax Office on how such payments should be treated. With such a huge number of potentially affected taxpayers involved, that is a surprising oversight. One would have expected that the big 5 would themselves have sought some form of class ruling on behalf of all their affected customers. 

The situation is even worse in that, again anecdotally, I am told that customers have been asked to sign “Agreements to Release” which include a clause to the effect that the customer will be responsible for the payment of all or any taxes that may arise in relation to the compensation payment that is made. That is a very poor cop-out and will only serve to further damage the reputation of the big 5 in circumstances where sufficient damage appears to have already been done. 

I wonder if any members have been involved in this issue on behalf of clients and whether they have sought specific advice from the ATO that may assist in resolving the matter? 

On another note, last week I mentioned we are conducting a survey of our members to ascertain the extent to which our membership is in agreement or not with the proposals that are being put forward by Labor. 

The link to the survey can be found below and I would encourage all members to complete the survey so that we have a reasonable idea of the views held by our members. 

I pose the statement in relation to which feedback is requested as “it will be good for Australia” rather than it will be good for you or for the tax profession. This is quite deliberate as I am hoping to be able to say something constructive about what our membership thinks will be good or not for the country as a whole. 

I propose to discuss the results of this survey in my address at The Tax Institute's 34th National Convention in Hobart on March 14, 2019, and the results will be publicly available from that day on. Accordingly, I am inviting members to complete this survey by 22 February 2019. That will give us sufficient time to collate the results and hopefully make some reasonably profound comments at the National Convention.

Members, we welcome your thoughts via the TaxVine Feedback inbox.

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