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Class action settlements

You may receive compensation from a class action settlement relating to one of your investments, namely shares, unit trusts, or a managed fund. This compensation will most likely include compensation for loss along with some interest. No TFN withholding tax maybe applied to the interest.

For the purposes of this article, we are going to assume that the Class Action Settlement was for Vocus shares. In our example, the fund received the following compensation on 3 February 2020.

The interest (and No TFN tax credits) should be included in the year it is received by journal entry.

How you treat the compensation amounts depends on whether the investment was sold before the compensation was paid.

  • If the investments are still owned, then you will need to reduce the cost base of the assets.
  • If the investment has been disposed of, then the compensation is treated as additional capital proceeds relating to the disposal of those investments in the financial year that the investment was sold.

INVESTMENT STILL OWNED

In this case, you will need to split the compensation into two components. There is the interest component and the compensation component.

Recording Interest

The first part is to record the interest and No TFN tax credits. This should be done by journal entry.

Choose More and then choose Journal Entries. On the Journal Entries screen, choose ADD NEW JOURNAL ENTRY.

On the Journal Entry screen, you can create the following journal entry:

Once you have completed the journal entry, choose ADD JOURNAL ENTRY.

Recording Compensation

The second part is compensation as part of a Return of Capital.

Choose Assets and then Corporate Actions.

On the Corporate Actions screen, choose RETURN OF CAPITAL.

Complete the following on the Return of Capital screen:

  • Record Date as advised on the statement
  • Select the Asset (in this case Vocus)
  • The posting date (receipt date)
  • Amount received (in this case $2,500); ignore any interest
  • Select the bank account the proceeds to be banked into

Then choose SAVE.

INVESTMENT PREVIOUSLY DISPOSED OF

If you disposed of the investment in a previous year, then the compensation should be reflected in the calculation of the capital gain or loss for that year.

The process you need to follow really depends as to whether you have lodged the SMSF Annual Return for the year that the investment was disposed of.

SMSF Annual Return not lodged for year that investment disposed of

If you have not lodged the Annual Return, then we recommend you use the following steps:

  • Record the interest received as per the instructions above.
  • Reverse the previous disposal recorded for the disposal of the investment.
  • Create a disposal for the investment but include the compensation proceeds.
  • Have journal entries which record:
    • the reversal of the compensation proceeds into Accounts receivable
    • Actual deposit of compensation into bank

We have used the previous example of $2,500 of compensation for Vocus shares. In addition, the Vocus shares were disposed of on 3 June 2019 for $20,000, which was recorded at the time.

Step 1 – Reverse the disposal journal entry

Find and choose the investment disposal transaction from 3 June 2019. Choose REVERSE and then select REVERSE TRANSACTION when asked to confirm.

Step 2 – Recreate the disposal transaction (but include the compensation)

The total proceeds for the disposal of the Vocus shares is now $22,500 ($20,000 plus $2,500).

Choose Assets and then Dispose Asset.

You will now see the Asset Disposal screen.

Complete the information on this screen, but make sure you:

  • Record the original date that the shares were disposed of
  • Include the compensation as part of the total proceeds. In this example, it is $22,500–which is made up of $20,000 for the original disposal of the shares plus the $2,500 of compensation paid.

Once you have completed the information, choose DISPOSE OF ASSET.

Step 3a – Journal entry to reflect compensation not banked until later

Because the compensation was received later, we need to be sure that the bank record as at 3 June 2019 is correct. When completing the journal entry, you should:

  • Include the date of the actual disposal of the investment at “Date”
  • Debit Accounts Receivable for the Compensation amount
  • Credit the bank account the investment disposal proceeds were paid into

Now that the full proceeds of the asset disposal are reflected as of 3 June 2019, the capital loss will be calculated correctly.

Step 3b – Record receipt of compensation proceeds

Another journal entry is required to record the actual receipt of the compensation. With this journal, you should:

  • Include the actual date the compensation monies were received at “Date”
  • Debit the bank account the investment disposal proceeds were paid into
  • Credit Accounts Receivable for the Compensation amount
SMSF Annual Return already lodged for year that investment disposed of

You will likely to need to request an amendment to the SMSF Annual Return to reflect the additional capital proceeds if the compensation relates to a disposal that happened in a previous financial year for which an SMSF Annual Return has been lodged.

In this case, you need to Rollback and Open the year in which the disposal takes place and then do the following:

  • Record the interest received as per the instructions above.
  • Reverse the previous disposal recorded for the disposal of the investment.
  • Create a disposal for the investment but include the compensation proceeds.
  • Have journal entries which record:
    • the reversal of the compensation proceeds into Accounts receivable.
    • Actual deposit of compensation into bank.
  • Complete the Year End Process to reflect the correct capital gain/loss made on disposal of the investment.
  • Lodge an amended SMSF Annual return.

Note: Detailed instructions for Steps 1 to 3 are above.