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This edited version has been archived due to the length of time since original publication.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 private advice

Authorisation Number: 1012664264842

Ruling

Subject: Mining Compensation

Question 1

Will the annual payment from the company under the compensation agreement be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the annual payment from the company under the compensation agreement be assessable as a capital gain under part 3-1 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-40

Income Tax Assessment Act 1997 section 104-155

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Prior to 1985 you acquired a property. At all times since owning the land you, in partnership with your parent and later your spouse have carried on a primary production partnership on the land.

In 20xx you and a company entered into various agreements where you agreed to the following:

In accordance with the agreements, parts of the activities have been completed on a portion of your land.

In 20xx you entered into a subsequent agreement the company.

Under the agreement you received the following:

The compensation amounts were the product of length negotiation between you and the company with reference to:

Reasons for decision

Compensation payments may be assessable as statutory income under section 6-10 of the ITAA 1997 if a capital gain tax (CGT) event has occurred. The Commissioners view on the taxation of compensation receipts is found in Taxation Ruling TR 95/35. To determine the correct tax treatment of a compensation receipt a look through approach must be adopted to determine what the most relevant asset is.

If an amount of compensation is received by a taxpayer wholly in respect of permanent damage suffered to an underlying pre-CGT asset of the taxpayer or for permanent reduction in the value of an underlying pre-CGT asset there will be no CGT consequence of the compensation payment. Alternatively if the compensation is not received in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

It is considered that the decisions in Nullaga Pastoral Company Pty Ltd v FC of T 78 ATC 4329; (1978) 8 ATR 757 and Barrett v Federal Commissioner of Taxation [1968] HCA 59; (1968) 118 CLR 666; 15 ATD 149; 10 AITR 685 are relevant in this relation to identifying the underlying asset. In both of those cases the landholders were conducting ongoing successful farming operations. The payments were held to be compensation for damage to property which formed part of the profit-yielding structure of the landholders. In keeping with Nullaga and Barrett it is considered that the relevant underlying asset in the current case is the property which forms the profit yielding structure of the taxpayer.

Having regard to your entire circumstances we have determined that the compensation receipt relates primarily to reduction in value and permanent damage of an underlying asset being your property which forms part of your profit yielding structure. In reaching this conclusion we have had regard to the following

From the above it is considered that the connection between the compensation receipt and the land is clear. Consequently the payments will represent a recoupment of purchase price and as the asset in question was a pre CGT asset there will be no taxation consequence of the compensation receipt.


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