1 Is the capital component of the lump sum payment you received assessable?
No. Question 2 Is the interest component of the lump sum you received assessable as ordinary income? Answer Yes. This ruling applies for the following period: Year ending 30 June 20XX The scheme commences on: 1 June 20XX
The Deceased passed away in June 20XX. At the time of their death the Deceased suffered from an illness. Their investments were under the care and management of a financial adviser (The Adviser). 'Person A' was married to the Deceased's sibling, 'Person B'. Person B is the Executor (The Executor) of the Deceased's estate (The Estate). There are five beneficiaries of the Estate. A couple of years after the Deceased's death, Person A was investigated. Person A made it difficult for The Executor to obtain probate, and during that time The Executor incurred significant legal fees. Once probate was obtained, it was discovered that the money in the Deceased's investments had been misused. In 20XX Person A was prosecuted and jailed. The Adviser's responsible body at the time was Responsible Body A. Some of the misuse of funds occurred while The Adviser was an authorised representatives (AR) of Responsible Body A. The responsible Body conducted a review into The Adviser's misuse of the funds. They determined that after The Adviser became an AR of the Responsible Body A, they misappropriated $X from the Deceased. Repayments of $X were made while The Adviser was an AR of Responsible Body A.
The net loss is therefore $X. Responsible Body A calculated interest on the loss suffered, based on what investments would have been recommended to the Deceased by a prudent financial adviser. They calculated interest to be $X. Responsible Body A and the Executor of the Estate entered into an agreement where Responsible Body A proposed to pay an amount of $X. This amount included: the net loss of funds for $X, and interest on the loss of $X A Deed of release was signed which finalised the matter. On XX March 20XX, Responsible Body A transferred an amount of $X, being Settlement monies from Insurance to the Trust Account of the Solicitor, for the Estate. After fees were paid, the remainder was distributed amongst the five beneficiaries.
Income Tax Assessment Act 1997 Section 6-5 Income Tax Assessment Act 1997 Part 3-1 Income Tax Assessment Act 1997 Part 3-3
Question 1 Detailed reasoning The investigation by Responsible Body A found that they were responsible for $X that was misappropriated by the Adviser while they were an AR of Responsible Body A. They have returned that amount to the Estate. The lump sum is not regarded as ordinary assessable income and is capital in nature. There is no assessable amount as a result of these funds being returned to the Estate. Question 2 Detailed reasoning Interest income is regarded as ordinary income and therefore assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997). Responsible Body A paid an amount of $X above the amount that was misappropriated, to reflect the time that both the Deceased and the Estate were deprived of the use of the funds. Therefore, the Estate is assessable on the interest payment it received from Responsible Body A.