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Ruling
Subject: CGT- Compulsory Acquisition
Questions and answers:
1. Will the compensation receipt (received as a solatium payment) fall under section 104-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore be treated as a capital gain or loss?
Yes.
2. Are you entitled to disregard any capital gain under section 118-37(1) of the ITAA 1997?
No.
This advice applies for the following period:
Year ended 30 June 2010
The scheme commenced on:
1 July 2009
Relevant facts
You owned two lots of Land, Lot X and Lot Y.
The land was rented or available for rent to your family company.
During the 2011 financial year you received an amount of $XYZ as a solatium to compensate you following the compulsory acquisition of part of Lot X and Lot Y.
Lot X was acquired post 19 September 1985.
Lot Y was acquired pre 19 September 1985.
You received amounts of $AAA, and $BBB for lots X and Y respectively for the value of the land.
You acknowledge that the compensation amounts received for the value of the land would be subject to the capital gains provisions.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 112-30
Income Tax Assessment Act 1997 Section 104-10(6)
Income Tax Assessment Act 1997 Section 118-37(1)
Reasons for decision
Compensation payments not of a personal nature
Section 102-20 if the Income Tax Assessment Act 19997 (ITAA) provides that you make a capital gain or loss as a result of a CGT event. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else. CGT assets include real estate acquired on or after 20 September 1985.
The compulsory acquisition of real estate, in whole or in part, triggers CGT event A1.
The CGT consequences of compensation payments for wrongs or injuries which are not of a personal nature are covered in Taxation Ruling TR 95/35.
TR 95/35 states that the CGT consequences of an award of damages depend on whether there is an underlying asset to which the damages have a direct and substantial link. Such a link may be established if there is a CGT asset which has been disposed of, permanently damaged or reduced in value by the circumstances which generates the right to compensation.
Paragraph 4 of TR 95/35 states that if a CGT event happens to an underlying asset then the compensation received is treated as capital proceeds. If the asset was a pre- CGT asset, or is otherwise exempt, the compensation generally has no CGT consequences. If the asset was a post- CGT asset, a capital gain or loss may arise from the CGT event.
You received an amount of money because of the compulsory acquisition of your land; this land is for CGT purposes the 'underlying asset'. Without the compulsory acquisition of the land you would not have received any amount of money.
The amounts of solatium you received are subject to the CGT provisions and are treated in the same way as the amounts you received for the value of the land.
Application to your land.
As Lot Y was acquired pre- 1985 it is a pre- CGT asset and there are no CGT consequences on the amounts received.
As Lot X was acquired after 1985 the total amount received in respect of the land is subject to CGT.
The formula used to calculate the cost base when an asset is partially disposed is found in Section 112-30 of the ITAA 1997.
Cost base of asset x Capital proceeds for the part of the asset disposed of
Capital proceeds PLUS value of the remainder of the property
Timing of the event
Section 104-10(6) if the ITAA 1997 states that if the asset was acquired under a power of compulsory acquisition the event is said to take place on the earliest of:
When you received compensation from the entity,
When the entity became the assets owner,
When the entity entered it under that power, or
When the entity took possession under the power
Section 118-37(1)
Any gains or losses arising from compensation or damages received for any wrong, injury or illness you or your relative suffers personally are ignored for CGT purposes per Section 118-37(1) of the Income Tax Assessment Act 1997 (ITAA 1997).
Damages which are covered under this section include damages for personal injuries, libel, slander or defamation. The amounts you received by way of a solatium do not fall under this category. The amounts paid to you were for the inconvenience and non- financial disadvantage caused by the compulsory acquisition of your land, not for any wrong, injury or illness suffered personally by you or your relatives. Any capital gain made cannot be disregarded by virtue of section 118-37(1) of the ITAA 1997.