Renewable Energy Zone (REZ) projects – tax treatment of compensation

Landholders whose properties are affected by Renewable Energy Zone projects may receive compensation from the entities completing the project. This may include compensation they are entitled to or calculated under state legislation governing the projects.

The compensation is to address the impact the project has on the landholder's land, their ability to use and enjoy the land and any lost income.

Specifically, landholders may receive compensation:

• to replace income lost during the construction phase of the project
• for temporary access to land or a construction easement during the construction phase of the project
• as a reimbursement for feasibility, valuation or legal and accounting fees incurred by the landholders
• for a permanent easement to house the transmission infrastructure once it's constructed
• in recognition of impacts on
  • a main residence on the land or its use during the construction phase
  • parts of the property that don’t house the transmission infrastructure during construction and operation
• in the form of an upfront or bonus amount for ‘signing on’ to an agreement with the infrastructure operator
• in the form of an annual payment calculated per kilometre of transmission infrastructure hosted.

How income tax and GST treatment is determined

The income tax consequences for a landholder of receiving an amount will depend on what it's received for in substance, rather than what it's called in the agreements entered into between the landholder and the infrastructure operator. However, amounts received by landholders will generally be assessable income.

If the landholder uses the land in an enterprise they carry on, the compensation received may be subject to GST. This will depend on:

• what the compensation payment is for
• the landholder's circumstances
• whether the landholder has supplied something to the infrastructure operator in return for the compensation and the circumstances in which that supply was made.

Determining what a payment is for

Factors that are important in determining what the payment (or a part of the payment) is for include:

• what the landholder is giving in return for the payment, e.g. temporary access to land, a permanent easement over land or services provided in respect of the infrastructure
• how the amount is calculated, e.g. is it calculated by reference to estimated income lost or as a fair market rate for being able to lease or rent land
• how the amount will be paid, e.g. as a lump sum or a series of recurring payments or instalments
• if there are on-going conditions that must be satisfied by the landholder before the payment(s) are received
• what the land, or that part of the land, is currently being used for, e.g. to carry on a business, to derive rent, as a principal place of residence, or as a lifestyle property
• what the legislative terms of the scheme are that govern the project and the compensation agreements.

Income tax treatment of common amounts received

The following are examples of common amounts received by landholders that they need to include in their assessable income. Amounts received:

• to replace lost income, e.g. because a section of the property won't be accessible and available to produce income during the construction phase
• for temporary access or a construction easement during the construction phase of the project
• to reimburse costs incurred by the landholder in relation to the compensation agreement where the landholder can or has claimed a deduction for the expenses
• as a 'sign on' payment to the land holder where the land is used in a business or for the purpose of making a profit on its disposal as ordinary income
• for annual hosting payments.

Capital gains or revenue treatment of amounts received

Some payments received by landholders may result in either capital gains tax (CGT) or revenue treatment, depending on the circumstances of the landholder. Amounts received:

• for the creation of a permanent easement, e.g. to house the transmission lines or other infrastructure once constructed, have CGT implications unless the land was held on revenue account (e.g. as trading stock, or as part of a land speculation activity for the purpose of making a profit) in which case the amount is ordinary income
• in recognition of impacts of the project on a main residence or its use during the construction phase, or on parts of the property which don’t house the transmission infrastructure, will have CGT implications unless the land was held on revenue account (e.g. as trading stock or as part of a land speculation activity for the purpose of making a profit
• as a 'sign on' payment to encourage a landholder to enter the agreement will have CGT implications if the land is used by the landholder for private reasons. However, it is assessable as ordinary income if the land was acquired as part of a business, e.g. to rent out for profit or as part of a scheme for the purpose of making a profit on its disposal.

When an amount is treated as a capital gain

When an amount received is treated as a capital gain, that gain:

• will be disregarded where the land was acquired before 20 September 1985
• may be able to be reduced by the general CGT discount if the landholder is a qualifying individual or trustee
• may be subject to the small business CGT concessions if the landholder meets the relevant conditions.

If an amount is both ordinary income and a capital gain, the anti-overlap provisions in the tax legislation will ensure the amount is not taxed twice. This occurs by reducing the capital gain by the amount that has been included as ordinary income.

Primary production concessions

Where a landholder is undertaking a primary production business on the land, any amount that is paid to replace lost primary production income may qualify for the primary producer concessions. These include income averaging and farm management deposits. The eligibility conditions for the concessions must be satisfied.

Apportionment of lump sums

If a landholder receives a lump sum made up of different components, the lump sum must be apportioned between its components on a reasonable basis. The landholder must keep evidence to show the basis for the apportionment. Examples of evidence are invoices for fees incurred for market valuations of assets.

GST treatment of amounts received by landholders carrying on an enterprise

Where the landholder is registered, or required to be registered, for GST and uses the land in carrying on an enterprise, some components of a compensation payment are not normally subject to GST while other components may be a taxable supply and subject to GST.

Components of a payment not normally subject to GST

These components include:

• payments in recognition of impacts on
  • a main residence on the land or its use during the construction phase
  • parts of the property that don’t house the transmission infrastructure during construction and operation
• payments to replace income lost during the construction phase of the project
• reimbursements for feasibility, valuation or legal and accounting fees incurred by the landholders.

Note that if the land is acquired by the infrastructure operator under a statutory power of compulsory acquisition, GST is generally not payable.

Components of a payment that may be a taxable supply and subject to GST

These components include payments:

• for temporary access or a construction easement during the construction phase of the project
• for a permanent easement to house the transmission infrastructure once it's constructed
• in the form of an upfront or bonus amount for ‘signing on’ to an agreement with the infrastructure operator.

For more information, see:

• Business income, losses, deductions and concessions
• Primary producers concessions
• Goods and services tax (GST).

If you need assistance with tax treatment of compensation payments you have received, see:

• Tailored technical assistance
• Applying for a private ruling
• GST – How we can help.