Edited version of your private ruling

Authorisation Number: 1012506871458

Ruling

Subject: Compensation payment

Question 1

Will the payment you receive from X be treated as compensation for permanent damage to, or permanent reduction in the value of your property?

Answer

No

Question 2

Will the payment you receive from X represent capital proceeds from a separate capital gains tax (CGT) event?

Answer

Yes

Question 3

Can you claim the general discount when calculating your capital gain from the CGT event?

Answer

Yes

Question 4

Are you required to record any capital gain from the event in your 2012-13 tax return?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2013

Year ending 30 June 2014

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You purchased a property during the 2010-11 income year.

You took up residence at the property a short time after. The property is a private residence and is not being used for an income producing activity. The family homestead is in the middle of the land.

Y received approval for a project on a neighbouring property. You have no interest in Y.

Approval for the project was published in the 2008-09 income year. The approval imposed various conditions of the project, including a requirement restricting project activities from occurring within a specified distance of noise sensitive premises during certain hours.

You entered into an agreement on during the 2012-13 income year with X. Under the agreement X will pay you a specified amount and X will be able to conduct project activities within a closer distance of that published in the project approval during certain hours.

No activities relating to the project will occur on your property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Subsection 104-25(1)

Income Tax Assessment Act 1997 Subsection 104-25(2)

Income Tax Assessment Act 1997 Paragraph 108-5(1)(b)

Income Tax Assessment Act 1997 Section 115-10

Reasons for decision

Taxation Ruling TR 95/35 considers the treatment of compensation payments and the capital gains tax (CGT) consequences for the recipient. TR 95/35 states that the particular asset for which compensation has been received by the taxpayer may be:

· an underlying asset;

· a right to seek compensation; or

· a notional asset in terms of section 104-155 of the Income Tax Assessment Act 1997 (ITAA 1997).

In determining which the most relevant asset is, it is often appropriate to adopt a 'look through' approach to the transaction or arrangement which generates the compensation receipt.

Paragraph 3 of TR 95/35 defines the term 'underlying asset' as 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.

Identifying the relevant asset and CGT event

When determining which underlying asset is the most relevant asset to which an amount of compensation relates, the taxpayer must be able to show that the compensation has a direct and substantial link with the underlying asset. 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.

In your case, you have entered into an agreement with that will allow the project activities to be carried out within a closer distance of that published in the project approval during certain hours. No activities relating to the project will be carried out on your property; they will only be carried out on adjacent land. You will receive a payment under the agreement; however no reference was made to how this amount was calculated.

Upon signing the agreement you disposed of your right to enjoy a specified distance between your residence and the project activities during certain hours.

A CGT asset includes a legal or equitable right that is not property (paragraph 108-5(1)(b) of the ITAA 1997). Where an intangible asset, such as a legal or equitable right is disposed of, CGT event C2 occurs under subsection 104-25(1) of the ITAA 1997.

The most relevant asset that has lead directly to the payment under the agreement is your right to enjoy a specified distance between your residence and the project activities during certain hours. Therefore, CGT event C2 will occur and the payment will represent capital proceeds for the disposal of the rights.

General discount

Under section 115-10 of the ITAA 1997, to qualify for the 50% general discount a capital gain must be made by an individual, a complying superannuation entity, a trust or a life insurance company. The capital gain must result from a CGT event happening after 11:45am on 21 September 1999 and must not have an indexed cost base. Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event.

In this case, you had the right to enjoy a specified distance between your residence and the project activities during certain hours. You disposed of this right upon signing the agreement with X during the 2012-13 income year.

This right existed for a period of more than 12 months; therefore you are entitled to apply the 50% discount to your capital gain.

Time of CGT event

Subsection 104-25(2) of the ITAA 1997 states that the time CGT event C2 occurs is:

· when you enter into the contract that results in the relevant asset ending; or

· if there is no contract - when the asset ends.

You entered into an agreement with X during the 2012-13 income year. Accordingly, CGT event C2 occurred on this date and any capital gain resulting from this event will be included in your 2012-13 tax return.