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Edited version of your private ruling
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Ruling
Subject: Compensation payment
Question 1
Did capital gains tax (CGT) event C2 occur in relation to the compensation payment made to you?
Answer
No.
Question 2
Does the compensation payment form part of the capital proceeds received in respect of the disposal of the property?
Answer
Yes.
Question 3
Are the CGT small business concessions available in relation to the compensation payment subject to meeting any relevant conditions?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2013
The scheme commenced on:
1 July 2012
Relevant facts and circumstances
You purchased a property jointly with your spouse.
You ran a business as a sole trader on the property and the residence on the property was also the main residence of you and your spouse for the entire period of ownership.
Company X operated a project on land adjacent to the property. Due to a change in the development consent for the project, your property came within the acquisition zone for the project.
Consequently, Company X purchased the property from you.
The purchase price for the property was listed on the contract as $X.
In addition to this amount, you also received an amount of $X as compensation for disturbance in accordance with an additional clause in the contract for sale
You satisfy the basic conditions for the small business concessions in relation to the disposal of the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Subsection 104-25(1)
Income Tax Assessment Act 1997 Subsection 116-20(1)
Reasons for decision
Taxation Ruling TR 95/35 discusses the treatment of compensation receipts. If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset (CGT event A1). In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation (paragraph 4 TR 95/35).
If the amount of compensation is not received in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. It is only in these cases that CGT event C2 would occur.
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 underlying asset is the asset which leads directly to the payment of the amount of compensation. For example, if a taxpayer receives an amount of compensation for the destruction of his or her truck, the truck is the underlying asset.
In your case you received compensation for disturbance with reference to the disturbance you incurred in disposing of the property due to the project and costs associated with you relocating. The payment was made under a provision within the contract of sale for the property.
Using the 'look through approach' we consider that the 'right to seek compensation' leads directly from the disposal of your property. Accordingly, your property is the 'underlying asset' for CGT purposes. Therefore, the full amount of compensation received is treated as the consideration received for the disposal of the property in addition to the purchase price listed on the contract for sale.
You have advised that the basic conditions for the small business concessions were satisfied in relation to the disposal of the property. As the compensation forms part of the capital proceeds for the disposal of the property, an A1 event, you may be able to access the small business concessions subject to meeting any further conditions relevant to each concession.