Edited version of your private ruling

Authorisation Number: 1012592859524

Ruling

Subject: Compulsory acquisition

Question 1

Will capital gains tax (CGT) event A1 occur as a result of the resumption of your sub-surface land?

Answer

Yes

Question 2

Will CGT event D1 occur as a result of the resumption of your sub-surface land?

Answer

No

Question 3

If you acquire a replacement asset in accordance with the requirements contained in section 124-75 of the Income Tax Assessment Act 1997 (ITAA 1997), can you choose to apply the rollover contained in Subdivision 124-B of the ITAA 1997 to any capital gain made as a result of the resumption of your sub-surface land?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

You own a property.

A government department, under the Acquisition of Land Act 1967, compulsorily resumed an area of land below the surface of your property.

A separate title was created in reference to the underground land.

You received a lump sum compensation amount in full and final settlement of all claims arising from the resumption.

No part of the surface area of the land above the resumed area has been damaged nor has any access or restrictions in use been placed upon the surface area of the land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 102-25(1)

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 Paragraph 124-70(1)(a)

Income Tax Assessment Act 1997 Section 124-75

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

CGT event A1 happens if you dispose of a CGT asset (section 104-10 of the ITAA 1997). CGT event D1 happens under section 104-35 of the ITAA 1997 'if you create a contractual right or other legal or equitable right in another entity.' If more than one CGT event happens in respect of a transaction, the most specific event is to be used (subsection 102-25(1) of the ITAA 1997).

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

'Underlying asset' is defined 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 (TR 95/35).

Paragraph 4 of TR 95/35 provides that where 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. 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.

In this case, a government department compulsorily resumed a sub-surface portion of your property. The payment was received in respect of a part disposal of the underlying asset, being your property. Accordingly, CGT event A1 is the most relevant event.

Subdivision 124-B rollover

Under the provisions of subdivision 124-B of the ITAA 1997, an entity may be able to choose to rollover a capital gain that results from a compulsory acquisition of a CGT asset they own.

One of the circumstances in which a taxpayer can make this choice is if the asset is compulsorily acquired by an Australian government agency (paragraph 124-70(1)(a) of the ITAA 1997). 'Australian government agency' is defined in subsection 995-1(1) of the ITAA 1997 as the Commonwealth, a State or Territory, or an authority of one of them.

In this case, a portion of sub-surface land has been compulsorily acquired by a government agency. Accordingly, subject to meeting the requirements of section 124-75 of the ITAA 1997 relating to the acquisition of a replacement asset, you will be entitled to apply the rollover contained in subdivision 124-B of the ITAA 1997 to any capital gain made from the A1 event.