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Edited version of your private ruling
Authorisation Number: 1012612987723
Ruling
Subject: Mining Compensation
Question 1
Will the payment under the agreement be assessable as income or a capital gain?
Answer
No
Question 2
Will the payment under the Agreement reduce the cost base of the relevant property for any future capital gain?
Answer
Yes
This ruling applies for the following period(s)
Income year ended 30 June 2014
The scheme commences on
1 March 2014
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
• The compensation agreement
You are the landowner of property used to carry on a business.
You have entered into a compensation agreement to decommission a water bore on your property.
The contract details the agreed authorised activities relevant to the damages caused.
The agreement provides that you have been compensated for the "impaired capacity" to the land. Impaired capacity is defined under the section 412 of the Water Act 2000 (QLD) as:
"412 When does a water bore have an impaired capacity
(1) An existing water bore has an impaired capacity if-
(a) there is a decline in the water level of the aquifer at the location of the bore because of the exercise of underground water rights; and
(b) because of the decline, the bore can no longer provide a reasonable quantity or quality of water for its authorised use or purpose."
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Subsection 110-55(6)
Reasons for decision
Taxation Ruling TR 95/35 provides the Commissioner's view on the taxation implications of compensation receipts. Accordingly to determine the tax treatment of a compensation payment a "look through" approach is adopted to identify the relevant asset to which the compensation relates.
Having regard to your full circumstances, it is accepted that you have been compensated primarily for permanent damage to an underlying asset being the farming property.
Consequently the compensation payments will not be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as the payments relate to a capital asset.
In this instance where there is no disposal of the underlying asset the receipts will instead amount to a reduction of the cost base of the relevant asset under section 110-55(6) of the ITAA 1997 as a recoupment of purchase price.