1052097230274 | Legal database

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Edited version of private advice

Authorisation Number: 1052097230274

Date of advice: 4 April 2023

Ruling

Subject: Conduct and compensation agreement payments

Question 1

Do any of the receipts (excluding the camp compensation payment) under the Conduct and Compensation Agreement (CCA) constitute assessable income in accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Do the camp compensation payments constitute assessable income in accordance with section 6-5 of the ITAA 1997?

Answer

Yes.

Question 3

To the extent that the receipts received under the CCA 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 4

To the extent that the receipts under the CCA 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 amount received under the CCA reduce the cost base of the Land under Subdivision 110-A of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You acquired Land after 20 September 1985.

The Land is used in a primary production business. There is no residence currently located on the Land.

You entered into a CCA with a Company and other authority holders for the impact the Authority Holders' coal seam gas (CSG) related activities will have on your Land with the construction of multiple gas production wells and the maintenance of existing wells on the Land.

The CCA stipulates compensation amounts to you for the impact of all continuing activities and proposed impacts due to the Petroleum Activities. The compensation under the CCA is paid in accordance with the Petroleum Legislation.

Conduct and Compensation Agreement

The CCA is a conduct and compensation under the petroleum legislation, the Mineral and Energy Resources (Common Provisions) Act 2014 (Qld).

The activities relating to the CSG wells are described in the CCA.

The Authority Holders must indemnify you and keep you indemnified from any claims or liabilities outlined in the CCA.

It is not expected that the CCA will result in you incurring additional costs in your business.

The compensation amounts to be paid are set out in the CCA, which include:

• an upfront compensation payment

• a construction compensation payment

• annual compensation payments, and

• a camp compensation payment.

The camp compensation payment is payable at the end of each month for the number of days in the month the camp is occupied.

The compensation amounts in the Agreement relate to the Compensatable Effects of carrying out the Activities (listed in the CCA) on your Land.

The CCA states Compensatable Effect means compensatable effect as defined in either or both of the Petroleum Legislation - the Mineral and Energy Resources (Common Provisions) Act 2014 (Qld) and the Environmental Protection Act 1994 (Qld). The definition of compensatable effect under subsection 81(4) of the Mineral and Energy Resources (Common Provisions) Act 2014 (Qld)) is as below:

(a) any of the following caused by the holder, or a person authorised by the holder, carrying out authorised activities on the eligible claimant's land -

i. deprivation of possession of the land's surface;

ii. diminution of the land's value;

iii. diminution of the use made, or that may be made, of the land or any improvement on it;

iv. severance of any part of the land from other parts of the land or from other land that the eligible claimant owns;

v. any cost, damage or loss arising from the carrying out of the activities under the resource authority on the land; and

(b) consequential loss incurred by the eligible claimant arising out of a matter mentioned in paragraph (a).

The CCA sets out the scope of compensation and lists out the effects that the compensation does not cover.

The CCA states that the parties will enter into a separate agreement for the purchase of the gravel if the Authorised Holders intend to extract gravel from the Borrow Pit on the Land. This means the compensation amounts do not include the income from selling gravel.

The CCA constitutes an alternative arrangement for noise for the purposes of the environmental authority issued under the Environmental Protection Act 1994 (Qld) in respect of the Petroleum Authority (including any replacement, amendment, renewal, alteration or substitution of that environmental authority) but does not constitute an alternative arrangement for noise from any major infrastructure. No separate payment for the alternative arrangement has been received.

The CCA provides that you may seek further compensation for any loss caused by activities that are not covered by the CCA.

You consider that the Activities carried out by the Authority Holders under the CCA could potentially reduce the value of the primary production output.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 110-40

Income Tax Assessment Act 1997 section 110-45

Income Tax Assessment Act 1997 Division 116

Reasons for decision

Summary

The camp compensation payments are considered ordinary income and form part of your assessable income in the income years the payments are received. The remaining compensation payments are not included in your assessable income and do not constitute capital proceeds in respect of a CGT event happening. Rather, these payments are considered to be for permanent damage to the Land and will be treated as a reduction in the cost base of the Land.

Detailed reasoning

Compensation payments as ordinary income

Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal service, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

• are earned

• are expected

• are relied upon, and

• have an element of periodicity, recurrence or regularity.

The camp compensation payments you receive are considered to be income from property, akin to rent or lease payments, and are considered ordinary income.

Compensation paid due to loss and damage of a capital asset in the process of a petroleum authority undertaking petroleum activities on a taxpayer's land is an isolated transaction. Whether a profit from an isolated transaction is ordinary income according to ordinary concepts depends on the circumstances of the case. Profit from an isolate transaction is generally ordinary income when both of the following elements are present:

(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and

(b) the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction (paragraph 6 of Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income).

Neither of the above elements apply in your situation. You did not enter the CCA to make a profit or gain. Rather, you as the Landholder and Occupier entered into the arrangement in order to receive compensation for the effect that the mining activities will have on your Land. These compensation payments are made in accordance with the legislative provisions of the petroleum legislation.

It is accepted the compensation (excluding the camp compensation payment) is for the permanent damage to the Land.

Accordingly, to the extent the payments are for the permanent damage and reduction in value of your Land the compensation payments paid under the CCA do not give rise to ordinary income or to a profit or gain arising from a profit-making undertaking or plan pursuant to section 6-5 of the ITAA 1997.

Compensation payments and the capital gains tax (CGT) provisions

Under section 6-10 of the ITAA 1997 some amounts that are not 'ordinary income' are included in your assessable income due to another provision of the tax law. These amounts are statutory income. Statutory income may arise from CGT events as consequence of an eligible claimant being entitled to receive compensation for the loss and destruction of a CGT asset.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts provides the Commissioner's view as to the CGT consequences of receiving a compensation payment. The ruling states that it is necessary to identify the underlying asset to which the payment relates and what has occurred to that asset.

The underlying asset is 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.

If there is more than one underlying asset, the relevant asset is the asset which leads directly to the payment of the amount of compensation. For example, it a taxpayer receives an amount of compensation for the destruction of his or her truck, the truck is the underlying asset.

If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying CGT asset, or part of an underlying CGT asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, the Commissioner considers that the amount is not consideration for the disposal of any other asset, such as the right to seek compensation.

If an amount of compensation is received by a taxpayer wholly in respect of permanent damage suffered to a CGT underlying asset of the taxpayer or for a permanent reduction in the value of a CGT underlying asset of the taxpayer, and there is no disposal of that underlying asset at the time of the receipt, the Commissioner considers that the amount represents a recoupment of all or part of the total acquisition costs of the asset.

Accordingly, the total acquisition costs of the CGT asset should be reduced by the amount of the compensation. No capital gain or loss arises in respect of that asset until the taxpayer actually disposes of the underlying asset.

In your case, the activities relating to the multiple CSG wells conducted by the Authority Holders on your Land will result in permanent damage to, or a permanent reduction in the value of the Land.

As you did not dispose of all or part of the affected Land there are no CGT consequences at the time of entering the CCA or receiving the compensation payments. The acquisition cost of the Land will be reduced by the compensation payments received in relation to the Land. That is, the cost base of the Land will be reduced by the compensation payments (excluding the camp compensation payments).

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