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Edited version of your private ruling
Authorisation Number: 1012434730817
Ruling
Subject: CGT - resumption of land and compensation
Question 1
Is the amount you received for compensation for visual amenity impacts and the effect of an easement of support over your existing property subject to capital gains tax?
Answer
Yes
This ruling applies for the following periods
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You were gifted the land after 20 September 1985.
The property is an investment property.
A Government department (the Department) resumed part of land from your property and transferred to you an equal portion of adjacent land ('land swap') in year ended 30 June 20XX.
You also received notice of the taking of easement in the 200Y financial year in relation to a separate parcel of land.
The Department paid an amount of $XX to you as compensation excluding any land component, and assessed according to visual amenity impacts and the effect of the easement.
You advised that the property has lost value following the construction on the resumed land, and suffers from a visual and noise impact.
$XX of the payment is for your valuer's fees for attendances in negotiations with the Department, and for provision of the valuer's advice in the matter.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Subsection 104-10(3)
Reasons for decision
Amounts received which are not direct compensation for loss of income, will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.
Taxation Rulings TR 95/35 and TR 97/3 discuss the capital gains treatment of compensation receipts. Taxation ruling TR 97/3 extends the application of TR 95/35 and should be read in conjunction with that ruling. TR 97/3 specifically deals with compensation received by landowners from public authorities. In your case, you received compensation from the Department (a Government authority) for the resumption of land for the easement. You were given an equal amount of land to compensate you for the 'land swap', so the sum received relates to compensation for resumption of land for the easement. Therefore, TR 97/3 will have direct application in this case.
Paragraphs 6 through 10 of TR 97/3 state:
…In the case of easements acquired under statute and the consequential disposal of the right to compensation, the most relevant asset is the landowner's pre-existing land with its rights of ownership including, for example, a right to exclude all others. This right to exclude all others is forfeited in part when the easement comes into existence. The loss of part of this right constitutes the disposal of part of the underlying asset (the land).
The acquisition of an easement by a public authority using the compulsory process provided in the relevant statute culminates in a declaration by notice in the Gazette that the easement has been acquired. However, it is possible that a public authority may acquire an easement by agreement with the landowner. Because the grantee of the easement (the public authority) has available, if it chooses to exercise it, the power to compulsorily acquire the easement, the amount received, in our view, takes on the same character as compensation for a compulsorily acquired easement. It is therefore appropriate that Part IIIA apply in the same way, that is, the consideration (compensation) is paid in respect of the part disposal of the land and not in respect of the grant of the easement.
In your case, you received compensation from the Department for the loss of your land due to the resumption of land for the easement.
As such, CGT event A1 (the disposal of a CGT asset) has occurred. Section 104-10 of the ITAA 1997 provides that the time of the A1 event is taken to have occurred when you entered into the contract for the disposal of the easement or, if there is no contract, when the change of ownership occurs.
If the capital proceeds received in compensation exceed the cost base of the asset in question, you would be considered to have made a capital gain, and it will be assessable under the capital gains tax provisions.
In your case, the easement notice was received in 20ZZ. Therefore, CGT event A1 occurred in the 200Y financial year and any capital gain will need to be included in that year. This is the case even thought the payment was not received until a later year.
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