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This edited version has been archived due to the length of time since original publication.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: 1012832206658

Date of advice: 2 July 2015

Ruling

Subject: Mining compensation

Question 1

Do the receipts under the Agreement constitute assessable income in accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

To the extent the receipts under the Agreement do not constitute assessable income in accordance with section 6-5 of the ITAA 1997 will the receipt of these amounts constitute capital proceeds under Division 116 of the ITAA 1997 in respect of a CGT event happening?

Answer

No.

Question 3

To the extent the receipts under the Agreement do not constitute assessable income in accordance with section 6-5 of the ITAA 1997 and do not constitute capital proceeds under Division 116 of the ITAA 1997 in respect of a CGT event happening does any compensation received reduce the cost base of the property under subsection 110-45(3) of the ITAA 1997?

Answer

Yes.

Question 4

To the extent the receipts under the Agreement do not constitute assessable income in accordance with section 6-5 of the ITAA 1997 and do not constitute capital proceeds under Division 116 of the ITAA 1997 in respect of a CGT event happening and the compensation received exceeds the cost base of the property are there any immediate capital gains consequences associated with that excess?

No.

This ruling applies for the following period

Year ended 30 June 2015 til year ended 30 June 2020

The scheme commences on

1 July 2014

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: 

The individuals own property used in a farming operation.

The landholders have entered into an Agreement for the purposes of compensating for the impact of certain activity on the land.

The Agreement provides an upfront compensation payment and annual payments (escalated annually by CPI).

The relevant act in the circumstances is the Petroleum and Gas (Production and Safety) Act 2004.

It is anticipated that during the construction period and for the duration of the ongoing activities carried on the land that there will be a significant impact on the quality of life for people living on the land due to noise, traffic, dust and light such that the former quite enjoyment of the property will no longer exist.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 110-45(3)

Income Tax Assessment Act 1997 section 110-55(6)

Income Tax Assessment Act 1997 Division 116

Reasons for decision

Question 1

Taxation Ruling TR 95/35 provides the Commissioner's view on the taxation implications of compensation receipts. Accordingly, to determine the tax treatment of a compensation payment a "look through" approach is adopted to identify the relevant asset to which the compensation relates.

Having regard to your full circumstances, it is accepted that you have been compensated primarily for the reduction in value to an underlying asset, being the property.

Consequently the compensation payments will not be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as the payments relate to a capital asset.

Question 2, 3 & 4

In this instance where there is no disposal of the underlying asset the receipts will instead amount to a reduction of the cost base of the relevant asset under subsection 110-55(6) of the ITAA 1997 as a recoupment of the purchase price.

Additionally paragraph 133 of TR 95/35 provides that any recoupment that exceeds the cost base of the property will not represent a taxable capital gain and, there will be no immediate capital gains tax consequences in respect of any excess.

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