Edited version of your private ruling

Authorisation Number: 1012439164193

Ruling

Subject: CGT - compensation for easement

Question 1

Is the amount you received for compensation for an easement for sound and vibration you're your property subject to capital gains tax?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You are the joint owner of the property (the property).

The property adjacent to yours is proposed to be used for events.

X company must comply with the X State's Department of Planning (the department) approval conditions (Planning approval) in accordance with their approval to hold events on the property adjacent to yours.

Under the Planning approval, X company is required to undertake noise attenuation works as needed to the adjacent owners' residences for those owners identified as 'sensitive receivers' of noise from the site.

The extent of works that the property will need for noise attenuation is unknown, so X company has paid a once-off amount of $XX to cover these expected expenses.

You have granted X company an easement for sound and vibration across the property, so that you would no longer be recognised as a 'sensitive receiver' by the department.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Subsection 104-35(3)

Reasons for decision

A capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a CGT asset. Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. An easement is a right over someone else's land or property. Therefore the easement over your property for the benefit of X company is a CGT asset.

Taxation Ruling 95/35 - Income tax: capital gains: treatment of compensation receipts (TR 95/35) states that:

34. We consider that the right to seek compensation is an asset for the purposes of the CGT provisions.

A compensation receipt, or compensation, includes any amount (whether money or other property) received by a taxpayer in respect of a right to seek compensation or a cause of action, or any proceeding instituted by the taxpayer in respect of that right or cause of action, whether or not:

· in relation to any underlying asset;

· arising out of Court proceedings; or

· made up of dissected amounts.

The 'look-through' approach is the process of identifying the most relevant asset. It requires an analysis of all of the possible assets of the taxpayer in order to determine the asset to which the compensation amount is most directly related. In your case, the money you received was paid as compensation for noise attenuation works and the easement over the land granted to X company. The relevant asset, in this case, is your property.

The Commissioner's policy in respect of easements is that they are not a part disposal of the original land; rather they are a creation of a new interest in the land (Taxation Ruling IT 2561).

CGT event D1 happens when you create a contractual right or other legal or equitable right in another entity. Under section 104-35 of the ITAA 1997, the time of the event is when you enter into the contract or create the right.

A capital gain or capital loss is made at the time of the event. You make a capital gain if the capital proceeds received from the creation of the right are more than the incidental costs you incurred that relate to the event and similarly, you make a capital loss if those capital proceeds are less (subsection 104-35(3) of the ITAA 1997).

In your circumstances, the time of the D1 event was when the easement was granted. The capital proceeds are your share of the $XX received as compensation.

Accordingly, you will make a capital gain on the granting of the right if the capital proceeds for the easement exceed your incidental costs and a capital loss if your capital proceeds are less than your incidental costs.