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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012538296612

Ruling

Subject: Compensation receipts - easement

Question 1

Is any of the compensation proceeds received assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Are all of the compensation proceeds received capital receipts?

Answer

Yes

Question 3

Will any capital gains you make as a result of receiving compensation proceeds be disregarded?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2013

Year ending 30 June 2014

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You own land which you acquired prior to 20 September 1985.

Since acquisition, the land has been used by a related entity in a primary production business.

No formal lease arrangement exists between you and the related entity. No rental fee is charged for the use of your land.

You have entered into a contract with a public authority, granting an easement over the land. The easement is to allow the public authority to undertake a specific construction project.

The easement contract allows for potential compensation payments.

Additionally, you entered into another agreement with the public authority that permits them to take resources from your land the sole purpose of constructing the project. You will be paid compensation under this agreement

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 104-10

Reasons for decision

Ordinary income

Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

Based on case law, it can be said that ordinary income generally includes receipts that:

In your situation you will receive various payments as a result of entering into agreements with a public authority. The payments are in respect of an easement that will be created over your land and additional disturbance costs in relation to the construction of the project. The payment was not earned by you as it does not relate to services performed. While you will receive more than one payment, it cannot be said there is an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation does not arise from a relationship to personal services performed.

Accordingly, the payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

Capital gains

Taxation Ruling TR 95/35 considers the treatment of compensation payments and the capital gains tax (CGT) consequences for the recipient. TR 95/35 states that the particular asset for which compensation has been received by the taxpayer may be:

In determining which is the most relevant asset, it is often appropriate to adopt a 'look through' approach to the transaction or arrangement which generates the compensation receipt.

'Underlying asset' is defined as the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity (TR 95/35).

Paragraph 4 of TR 95/35 provides that where an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation.

Taxation Ruling TR 97/3 extends the application of TR 95/35 in respect of compensation receipts received from public authorities. Where compensation is received for the compulsory acquisition of an easement by a public authority, the compensation cannot be said to be received for the grant of the easement. Rather, TR 97/3 concludes that an amount of compensation received by a landowner for the loss of part of the rights of ownership is accepted as being consideration received in respect of the part disposal of the underlying asset (the land).

Paragraphs 9 and 10 of TR 97/3 provide that even where the easement is acquired by agreement with the landowner the Commissioner takes the view that the compensation received takes on the same character as an amount paid in relation to a compulsorily acquired easement. This is because the grantee of the easement (the public authority) has available, if it chooses to exercise it, the power to compulsorily acquire the easement.

Application to your circumstances

In this case, you will receive disturbance compensation under the easement contract from a public authority as a result of granting an easement over your land to facilitate the construction of a specific project. Additionally, you will receive payments in respect of the access you will provide the public authority to resources from your property for the purpose of constructing the project.

We consider that all of the above payments will be received in respect of the grant of an easement over your land in favour of a public authority. In accordance with TR 97/3, the payments will be compensation for the loss of part of your rights of ownership of the land and can be considered to be in respect of the part disposal of the land.

The underlying assets that have been disposed of, being parts of your rights of ownership of the land, are pre-CGT assets. Accordingly, any capital gains you make as a result of receiving compensation will be disregarded under paragraph 104-10(5)(a) of the ITAA 1997.

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