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Edited version of your written advice
Authorisation Number: 1051240048818
Date of advice: 27 June 2017
Ruling
Subject: Capital gains tax - receipt of compensation payment
Question 1
Will the payment for compensation made in relation to the agreement be assessable as income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
Question 2
Will the payment for compensation made in relation to the agreement be assessable as a capital gain under the capital gain tax (CGT) provisions in Part 3-1 and 3-3 of the ITAA 1997?
Answer
No.
Question 3
Will the payment made under the agreement reduce the cost base of the underlying asset?
Answer
Yes.
This ruling applies for the following periods:
The year ending 30 June 2017.
The scheme commences on:
1 July 2017
Relevant facts and circumstances
You own post-CGT land which is used for primary production activities.
You will enter into a conduct and compensation agreement (CCA) with another entity.
The CCA relates to your post-CGT land.
You will be compensated a specified amount for the impacts of the activities carried out.
The CCA provides that the payment compensates for all of the activities including the loss of use of part of the land, all impacts of noise, light, dust, odour, vibration, vehicular movements and loss of amenity generally.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Subsection 110-55(6)
Reasons for decision
Summary
The compensation receipt will amount to a reduction of the cost base of the relevant property as a recoupment of the purchase costs.
Detailed reasoning
There can be CGT consequences when you receive compensation. Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts gives the Commissioner's view on the treatment of compensation receipts.
If an amount of compensation is received by a taxpayer wholly in respect of permanent damage suffered to a post-CGT underlying asset of the taxpayer or for a permanent reduction in the value of a post-CGT underlying asset of the taxpayer, and there is no disposal of that underlying asset at the time of the receipt, we consider that the amount represents a recoupment of all or part of the total acquisition costs of the asset.
Compensation received by a taxpayer has no CGT consequences if the underlying asset which has suffered permanent damage or a permanent reduction in value was acquired by the taxpayer before 20 September 1985 or is any other exempt CGT asset.
Having regard to your full circumstances, it is accepted that the compensation payment relates to the loss of use and amenity of an underlying asset, being the property. Consequently the compensation payment will not be assessable income under section 6-5 of the ITAA 1997 as the payment will be of a capital nature. As there is no disposal of the underlying asset the receipt will instead amount to a reduction of the cost base of the relevant property under section 110-55(6) of the ITAA 1997 as a recoupment of the purchase costs.
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