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Edited version of your private ruling
Authorisation Number: 1012617253191
Ruling
Subject: Compensation payments
Question 1
Will any compensation payments made under the Agreement be assessable as ordinary income or a capital gain?
Answer
No
Question 2
Will any compensation payments made under the Agreement reduce the cost base of the relevant property?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You own a property that is used in your business.
You have entered into the Agreement with X, allowing X to conduct activities on your property.
Under the Agreement, X is required to pay compensation to you for loss caused by damage during the activities or for deprivation of the use of the land.
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. 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. If no underlying asset can be identified, the compensation may relate to the disposal of the right to seek compensation.
Having regard to your full circumstances, it is accepted that the compensation payments will primarily relate to the damage and the loss of use and amenity of an underlying asset, being the 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.
We consider that the compensation payments relate to a permanent reduction in the value of the property. In this instance as there is no disposal of the underlying asset the receipts will instead amount to a reduction of the cost base of the property under section 110-55(6) of the ITAA 1997 as a recoupment of the purchase costs.