Edited version of private advice

Authorisation Number: 1052136331072

Date of advice: 4 July 2023

Ruling

Subject: Compulsory acquisition of land

Issues

Question 1

Was the gain on the disposal of the Land held jointly by the Taxpayer together with her spouse assessable as ordinary income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No - the disposal of the Land will be considered a disposal of a capital asset that is subject to capital gains tax pursuant to section 104-10 of the ITAA 1997.

Question 2

Did the disposal of the Land due to compulsory acquisition for the purposes of section 104-10 of the ITAA 1997 happen in the 2006 income year?

Answer

Yes.

Question 3

Was an amount in the nature of interest received by the Taxpayer, being half the amount paid as statutory compensation, assessable in the 2011 income year for purposes of section 6-5 of the ITAA 1997 when it was paid by the relevant acquiring authority which had previously compulsorily acquired the Land?

Answer

Yes.

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

The Properties

The Taxpayer and their late spouse were Australian residents for tax purposes at all relevant times.

During the late spouse's lifetime, the Taxpayer and their late spouse jointly owned 2 adjoining parcels of land.

The Taxpayer owned a third parcel of land as sole proprietor that adjoined the other 2 parcels referred to above.

Parcel 1 was acquired jointly prior to 20 September 1985 (Pre-CGT Parcel).

Parcel 2 which adjoined the first parcel was acquired jointly after 20 September 1985. The Taxpayer acquired the third parcel after 20 September 1985 (collectively Post-CGT Parcels).

From the time of acquisition of the Pre-CGT Parcel until the XXXX income year, there was no circumstance or event that could treat the land as being a post-CGT asset within the meaning of Division 149 of the ITAA 1997.

At all relevant times, the Taxpayer and their late spouse occupied their main residence which was situated on the Pre-CGT Parcel. The land size exceeded 2 hectares. However, no part of the main residence was the subject of a CGT event, and therefore no relevant provisions in subdivision 118-B ITAA 1997 need to be considered.

The Taxpayer and their late spouse carried on a business on both the Pre-CGT Parcel and the Post-CGT Parcels for X decades.

Compulsory acquisition

In the XXXX income year, State Authority A issued a notice to the Taxpayer and their late spouse under the relevant State legislation that it intended to compulsorily acquire a part of Parcel 1 (the Pre-CGT Parcel) and a part of Parcel 2, (the Post-CGT Parcel) (collectively described as the Land).

State Authority A published its Notice of Acquisition under the State Government Gazette on XXXX. On publication of the Notice of Acquisition, the acquired land immediately vested in the acquiring authority and the dispossessed owners had a right to claim compensation.

The State legislation requires the acquiring authority to make an offer to the dispossessed owners within 14 days of publication of the Notice of Acquisition. State Authority A made an offer of compensation which was rejected by the Taxpayer and their late spouse.

In the event that such an offer is rejected, the claim becomes a 'disputed claim' pursuant to the State legislation which provides for:

•         The matter to be referred to the Tribunal or the Court by either party; and

•         The payment of interest is a form of statutory compensation on the difference between the amount on offer on the date the claim becomes a 'disputed claim' and the amount awarded by either the Tribunal or the Court, at a rate fixed under State law for the period computed from the date of publication of the Notice of Acquisition until the date of payment of the compensation.

In XXXX, the matter was referred by State Authority A to the Tribunal.

Settlement of the dispute

On or about XXXX the parties agreed to settle the compensation claim for $X, on an "all in" basis (of which $X was previously paid as advances). This amount also included an amount of $X comprising statutory interest on the compensation and accrued interest on expenses.

The Taxpayer and their late spouse received advice at the relevant time that the market value of the Land acquired was $X, with the remainder of the amounts received being attributable to a diminution in the value of the remaining land due to severance and disturbance. Such amounts are considered in their entirety as capital proceeds.

All amounts were received in the XXXX income year.

The Taxpayer's previous conduct

From the time of commencement of the business until the compulsory acquisition of the Land in XXXX, there was no change in the nature of the business and apart from natural growth, experienced the usual vicissitudes that come with running such a business.

Neither the Taxpayer nor their late spouse have had any previous involvement in any transactions involving the development of properties (i.e. buying and selling land for profit, whether on an "as is" basis or after developing the land).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Reasons for decision

Questions 1 and 2

Summary

The compulsory acquisition of the Land is considered to be the disposal of a capital asset and the resulting gain will be subject to capital gain tax pursuant to subsection 104-10(4) of the ITAA 1997.

The time of the CGT event for the purposes of subsection 104-10(6) of the ITAA 1997

is the date the notice of acquisition is published in the government gazette as ownership vests on that date.

Detailed reasoning

The Land is CGT asset as defined in section 108-5 of the ITAA 1997.

Relevantly, CGT event A1 under section 104-10 of the ITAA 1997 happens when land is compulsorily acquired.

The time of the event depends on whether the disposal of the CGT asset occurs as a result of the exercise of a power of compulsory acquisition (i.e. not a mere threat).

Subsection 104-10(6) of the ITAA 1997 provides that if the CGT asset being disposed of was acquired from the taxpayer by an entity under a power of compulsory acquisition conferred by an Australian law or a foreign law, the time of CGT event A1 is the earliest of when:

• the taxpayer received compensation from the other entity
• the other entity became the owner of the CGT asset
• the other entity entered the CGT asset pursuant to the power of compulsory acquisition, and
• the other entity took possession of the CGT asset pursuant to the power of compulsory acquisition.

Where the disposal is on capital account the CGT rules will generally apply and the proceeds are not ordinary income.

Section 118-20 of the ITAA 1997 operates as the anti-overlap provision to reduce any capital gain by the amount which has been otherwise assessed as ordinary income under section 6-5 of the ITAA 1997.

The Taxpayer and their spouse conducted their primary production on the Land for over X years.

The compulsory acquisition of the Land is considered to be the disposal of a capital asset and the resulting gain will be subject to capital gain tax pursuant to subsection 104-10(4) of the ITAA 1997. There was no intention or purpose of making a profit or gain by sale at the time of acquisition and this intention did not change. It would be reasonable to conclude that the disposal of the Land was neither an ordinary incident of the business nor an isolated or commercial transaction entered into with a profit-making intention.

The time of the CGT event for the purposes of subsection 104-10(6) of the ITAA 1997

is the date the notice of acquisition is published in the government gazette as ownership vests with the other entity on that date.

Questions 3

Summary

The interest components are assessable income (i.e. not subject to capital gains tax regime). The interest income is assessable when it was received in the XXXX income year.

Detailed reasoning

Interest income is assessable as ordinary income under section 6-5 of the ITAA 1997.

Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings explains that generally interest is derived, or arises, when it is received or credited.

Broadly, Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts confirms that any amount which is in the nature of interest, and which can be identified as interest, and whether paid as part of the compensation or separately, constitutes assessable income of the taxpayer under the general income provisions. It may also represent part of the consideration for the disposal of either the underlying asset or the right to seek compensation. In that case, section 118-20 of the ITAA 1997 would then apply to prevent any double taxation of that amount.

In these circumstances, the interest component relates to the loss of income rather than the loss of the capital asset and is derived when it was received in the XXXX income year.

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