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This edited version has been archived due to the length of time since original publication.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

Authorisation Number: 1012761638697

Ruling

Subject: Capital Gains Tax

Question 1

Will the one off payment from the company be assessable as ordinary income?

Answer

No

Question 2

Will the one off payment from the company represent capital proceeds of capital gains tax (CGT) event A1?

Answer

Yes

This ruling applies for the following period(s)

Income year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

A company has used a one hectare parcel of your land to secure an environmental offset for damage and clearance to large trees in the construction of infrastructure.

You have entered into an agreement with the local council and the company under the relevant environmental legislation.

You have received a one off payment of $X from the company for entering into this agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-35

Reasons for decision

To determine whether the receipt of the payment has the character of ordinary income assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or capital proceeds assessable under the CGT regime in Part 3.1 of the ITAA 1997 regard must be had to the totality of your situation and the common law indicators determined by the courts. In GP International Pipecoater Pty Ltd v FCT (1990) 170 CLR 2124; 21 ATR 1 the High Court summarised the relevant indicators, at 1,7:

None of the above principles are determinative in their own right and the relevance and weight to be given to each principle will depend on the circumstances of the case. In Montgomery v FCT (1999) 198 CLR 639; 42 ATR 475 the High Court provided the following:

In applying the above to your situation we consider that the incentive payment is capital in nature, we have reached this conclusion based on the following reasons:

Capital Gains Tax

Section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss if, and only if, a CGT event happens to a CGT asset.

Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1. It provides that CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) defines a disposal as:

Section 104-35 describes another CGT event D1. It provides that CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity. However subsection 104-35(5) provides that D1 does not happen if the right requires you do something that is another CGT event.

Taxation Ruling TR 97/3 provides the Commissioner's view on the capital gains tax consequences of compensation received by landowners from public authorities. It provides at paragraph 12 and 13:

Consequently CGT event A1 has happened as you have disposed of part of the rights attached to your land. Consequently you may have access to the general CGT discount if you have held the property for longer than 12 months.


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