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Edited version of your private ruling
Authorisation Number: 1012599900193
Ruling
Subject: Compensation payment
Question 1
Is the final compensation payment assessable as ordinary income?
Answer
No.
Question 2
Is the final compensation payment assessable as a capital gain?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 2012
The scheme commences on
1 July 2011
Relevant facts and circumstances
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
• the application for private ruling, and
• documentation provided with the application for private ruling.
The company operated a business on a property.
During the 2011-12 financial year, a portion of the business premises was compulsorily acquired by a government department.
The company received a cheque for $X (the advance payment) in the 2011-12 financial year. The sum comprised the advance payment of $Y together with interest.
In the 2011-12 financial year the company sought further compensation for the business impact of the compulsory acquisition and professional costs.
The government department offered a final payment in full and final satisfaction of the company's claims. An amount was paid to the company in the 2011-12 financial. This comprised the final payment and interest.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 102-20
Income Tax Assessment Act 1997 section 108-5
Reasons for decision
Question 1
Certain acts enable public authorities to take land or an interest in land (including an easement) for specified purposes and confer on the affected landowner a right to compensation.
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.
The compensation is not considered income received in the course of carrying on a business and is therefore not assessable under section 6-5 of the ITAA 1997.
Question 2
Capital gains tax (CGT) is the tax you pay on certain gains you make. Section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss as a result of a CGT event happening to an asset in which you have an ownership interest. Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property; or a legal or equitable right that is not property.
Taxation Ruling TR 95/35 discusses the capital gains tax implications for compensation receipts. Where compensation is received, you need to look at what asset has been disposed of.
As discussed above, 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', the Commissioner will treat the compensation as consideration for that disposal (CGT event A1).
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.
Application to your circumstances
In this case, the company received compensation for the compulsory acquisition of a portion of land. The compensation was received in two separate payments. The documentation provided states that the advance and final compensation payments together constitute compensation in full satisfaction of the company's claims.
Using the 'look through approach' we consider that the 'right to seek compensation' leads directly from the loss of part of the company's land and is the 'underlying asset' for CGT purposes. Therefore, the final compensation payment received is treated as consideration received for the disposal of the land.