Edited version of your private ruling

Authorisation Number: 1012556919763

Ruling

Subject: taxation implications of the compensation received for an easement

Question 1

Are the proceeds received in compensation for the acquisition of an easement over your land assessable under the capital gains tax (CGT) provisions of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes

Question 2

Will the compensation received be considered to be in respect of the part disposal of the underlying asset (the land)?

Answer: Yes

Question 3

Will any capital gain made from the part disposal of the underlying asset (the land) be disregarded due to the asset being a pre-CGT asset?

Answer: Yes

Question 4

Will the compensation received be treated the same whether the easement is acquired compulsorily, or under voluntary agreement, where the acquiring body has the authority to compulsorily acquire the land if necessary?

Answer: Yes

This ruling applies for the following period(s)

Year ending 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

You acquired the property prior to 20 September 1985.

You lived in a caravan on the land until your dwelling was constructed on the land prior to 20 September 1985.

The property was used by X, for a commercial operation from its acquisition date until the mid 1990's.

In the 1980's you sold part of the land. .

In 1990, you subdivided the remaining property and sold another parcel of land.

You retained the remaining land. The property is your main residence.

An entity wishes to acquire an easement over the property to construct powerlines.

You will receive compensation for the acquisition of the easement.

You state that you may come to a voluntary agreement with the entity to acquire the easement.

Letters from the entity state that the relevant Act provides authority for the entity to acquire land where agreement cannot be reached. Acquisition of an easement may take place through a compulsory acquisition process in accordance with the Land Acquisition (Just Terms Compensation) Act 1991.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 112-30

Reasons for decision

Detailed reasoning

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. This ruling, therefore, will have direct application in this case.

Paragraph 4 of TR 97/3 states:

Compensation in respect of an easement created by statute in favour of a public authority cannot be said to have been received for the grant of the easement. The Land Acquisition (Just Terms Compensation) Act 1991 (NSW) and similar Acts in other jurisdictions enable public authorities to take land or an interest in land (including an easement) for specified purposes and confer on the affected landowner a right to compensation.

In these circumstances, the landowner cannot be said to have created an asset…the easement is created by operation of the relevant statute and is vested in the public authority. This constitutes a compulsory acquisition of the easement.

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.

Section 104-10 of the Income tax Assessment Act 1997 (ITAA 1997) provides that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. The time of the event is:

a) when you enter into the contract for the disposal; or

b) if there is no contract - when the change of ownership occurs.

Subsection 104-10(5) of the ITAA 1997 provides that any capital gain or loss made from the event will be disregarded if you acquired the asset before 20 September 1985 (pre-CGT).

Section 112-30 of the ITAA 1997 provides apportionment rules which can be used to calculate the cost base of an asset when a CGT event happens to some part of the asset. Subsection 112-30(3) of the ITAA 1997 provides the following formula:

Application to your circumstances

You expect to receive a compensation payment from an entity for the acquisition of an easement on your land. You intend to come to a voluntary agreement with the entity in relation to the easement. However, if you do not come to a voluntary agreement, the entity has the authority to compulsorily acquire the easement under the relevant Act.

Therefore, whether you come to a voluntary agreement with the entity, or the land is compulsorily acquired, the compensation payment is considered to be in respect of the loss of part of your rights of ownership which constitutes the disposal of part of the underlying land (a capital asset). As such, CGT event A1 will occur.

As there has been a part disposal of the land, you should calculate the cost base of the asset in accordance with the apportionment rules as detailed above.

If the capital proceeds received in compensation exceed the cost base of the asset in question, you will make a capital gain. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

In any case, as the asset in question is a pre-CGT asset, any capital gain or loss made from the event will be disregarded.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).