SMSF trustees must ensure their fund is entitled to receive compensation payments as it will determine how the transaction is treated for reporting purposes, a technical specialist has noted.
Heffron head of education and content Lyn Formica said while there were a number of ways for an SMSF to process a compensation payment, it was critical to first consider if it was entitled to receive it.
Formica made the comment in regards to a question, raised in a technical webinar today, about how an SMSF would handle a payment made from the Compensation Scheme of Last Resort (CSLR).
“This is very similar to the situation we had a number of years ago where banks and financial institutions were making remediation payments to SMSFs because of ‘fees for no service’, and like those payments, when you’ve got a payment under the CSLR, we need to work out who is being compensated,” she said.
“Is it the SMSF that has the right to this compensation and if it is, make sure you’re absolutely certain of that because if it is the individual who has the right to this compensation, and the payment goes into an SMSF, that will be a contribution and an increase in the capital of the fund provided for the benefit of one of the members.”
She pointed out the ATO has provided guidance around compensation paid to SMSFs and had released further information on the tax treatment of payments from the CSLR that was outlined in QC72107.
“The ATO gives a summary there of how that payment should be treated, but we need to work out what the compensation is for,” she added.
“If the compensation is a reimbursement of adviser fees and the SMSF had claimed a tax deduction for those fees, then you’d be putting the compensation payment through as assessable income.
“Alternatively, if it was in relation to the loss of an investment or a reduction in value, if the investment is still held, then you would add the compensation payment to the cost base of the asset.
“If you have already sold it, then you will probably need to amend a previous tax return to state you’ve got additional capital proceeds in relation to that particular asset.”
