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This edited version has been archived due to the length of time since original publication.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

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1012791385234

Ruling

Subject: Capital gains tax

Question 1

Are the proceeds from the grant of the easement over the property assessable income under section 6-5 or section 15-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the compensation payment relating to the construction of the pipeline assessable income under section 6-5 or section 15-5 of the ITAA 1997?

Answer

No.

Question 3

Are the proceeds from the sale of the property assessable income under section 6-5 or section 15-5 of the ITAA 1997?

Answer

No.

Question 4

Will the proceeds from the grant of the easement over the property be taken into account under the capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997??

Answer

Yes.

Question 5

Will the compensation payment relating to the construction of the pipeline reduce the cost base of the property?

Answer

Yes.

Question 6

Will the proceeds from the sale of the property be taken into account under the CGT provisions in Part 3-1 of the ITAA 1997??

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

29 March 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you

You were appointed as statutory trustee for the sale of the property during the 2009-10 financial year.

The property is a rural holding.

The property was transferred to you during the 2009-10 financial year.

In your capacity as trustee for sale, you:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 15-15.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 104-55.

Income Tax Assessment Act 1997 subsection 110-25(2).

Income Tax Assessment Act 1936 Section 161.

Reasons for decision

Summary

The dealings with the land are on capital account and are not ordinary income.

Detailed reasoning

Income

Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Additionally, section 15-15 of the ITAA 1997 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997, or which arises in respect of the sale of property acquired on or after 20 September 1985.

Although the legislation does not define income according to ordinary concepts, a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income. 

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present:

In this case, you were appointed as statutory trustee to sell the property. Your intention as the statutory trustee was to sell the property and distribute the proceeds to the relevant parties as per the court order. There was no profit making intention in your capacity of statutory trustee. Therefore, the proceeds from the easement, construction of the pipeline and the sale of the property are not ordinary income.

Capital gains

Land, or an interest in land, is a capital gains tax (CGT) asset under section 108-5 of the ITAA 1997.

The sale of an asset is a disposal which gives rise to CGT event A1. 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.

Easement

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.

In this case, an easement over the property was compulsorily acquired. In accordance with TR 97/3 this will be treated as a partial disposal of the property and CGT event A1 will occur. Any potential capital gain or loss is determined in accordance with Part 3-1 of the ITAA 1997.

Compensation for pipeline

As discussed above, TR 95/35 considers the CGT consequences of compensation payments. Paragraphs 6 to 9 of TR 95/35 provide the following guidelines on the treatment of compensation for permanent damage to or permanent reduction in the value of the underlying asset:

In this case, you received a compensation payment in relation to a pipeline that was constructed over part of the property. The property was not disposed of at that time. We consider that the compensation payment related to the permanent reduction in the value of the property as a result of the construction of the pipeline. Accordingly, the cost base of the property will be reduced as described in TR 95/35.

Disposal

When you disposed of the property, CGT event A1 occurred. Any potential capital gain or loss is determined in accordance with Part 3-1 of the ITAA 1997.


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