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Edited version of your written advice
Authorisation Number: 1051458433776
Date of advice: 18 December 2018
Ruling
Subject: Compensation payment received under a decommission agreement
Question 1
Will the compensation payments received under the Decommissioning Agreement be assessable as ordinary income as defined by section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
It is determined that the compensation payments to be received from Company X are not profits from an isolated transaction as you do not intend to make a profit from the transaction. More importantly, the compensation payments are not made in the course of carrying on a business or in carrying out a business operation or commercial transaction.
Accordingly, the compensation payments made under the Decommissioning Agreement do not give rise to income according to ordinary concepts pursuant to section 6-5(1) of the ITAA 1997.
Question 2
Will compensation payments made under the Decommissioning Agreement represent capital proceeds for any CGT event in Division 104 of the ITAA 1997?
Answer
No.
The Commissioner is satisfied that you are entitled to compensation in relation to your land as it has suffered permanent damage or reduction in value as a result of the mining activities.
It is considered that the compensation payments to be received by you under the Decommission Agreement with Company X do not represent capital proceeds for any CGT event in Division 104 of the ITAA 1997.
Question 3
Will the compensation payment under the Decommissioning Agreement reduce the cost base of the relevant property for any future capital gain under section 110-40 or s110-45 of the ITAA 1997?
Answer
Yes.
It is considered that the compensation payments to be received by you under the Decommission Agreement with Company X will reduce the cost base of the post-CGT land under sections 110-40 or 110-45.
Question 4
Will any part of the compensation payments received under the Decommissioning Agreement be assessable as statutory income as defined by section 20-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
The payments will be an assessable recoupment under section 20-20 of the ITAA 1997 but only to the extent that the amount received represents the recoupment of deductible expenses and are not received as compensation for the permanent damage to the water resource on the property.
This ruling applies for the following period(s)
Year ending 30 June 2019
Year ending 30 June 2020
The scheme commences on
1 July 2018
Relevant facts and circumstances
A number of years ago you acquired the land.
You entered into a compensation agreement under the Water Act 2000 with Company X to compensate you for the decommissioning of the water bore on your land.
The contract details the Agreed Authorised Activities relevant to the damages caused.
Company Y is the responsible tenure holder for the bore.
As a result of Company Y exercising its underground water rights under Chapter 2 Part 4 of the Petroleum and Gas (Production and Safety) Act 2004, Company X have advised that the bore is likely to have an "impaired capacity".
Under the Water Act 2000 Company X must, as the petroleum tenure holder, enter into a Make Good Agreement (the agreement) with the bore owner. A Make Good Agreement has been negotiated and an offer of compensation under the agreement has been proposed of a lump sum payment.
Under the agreement, certain make good measures are to be undertaken by Company X including-
(a) The payment of compensation to the Landowner; and
(b) Decommissioning activities.
The term "decommissioning activities" is defined in Schedule 2 to the agreement to include a number of activities including:
(a) Construction of a lease pad around the bore;
(b) Construction of grids, gates and access tracks; and
(c) Subsequent rehabilitation of any land impacted in the course of carrying out the activities.
All activities are likely to take place in the fourth quarter of the application year.
This definition indicates that more than just the bore itself is impacted by the tenement holder's activities.
Pursuant to clause 6(f) of the agreement, the make good measures provide full and appropriate compensation for the following:
(a) Likely impaired capacity to the bore resulting from Company X activities;
(b) The permanent impairment to the bore as a result of decommissioning; and
(c) Decommissioning activities
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 6-10
Income Tax Assessment Act 1997 section 20-20
Income Tax Assessment Act 1997 Division 104
Income Tax Assessment Act 1997 section 110-40
Income Tax Assessment Act 1997 section 110-45
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