Edited version of private advice

Authorisation Number: 1012623529631

Ruling

Subject: Mining Compensation

Issue 1

Compensation for Easement

Question 1

Will the easement compensation be treated as capital proceeds for the happening of Capital Gains Tax (CGT) event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

If CGT event A1 occurs should any resulting capital gain be subject to the 50% discount under division 115 of the ITAA 1997?

Answer

Yes

Question 3

If CGT event A1 occurs will the relevant asset be active for the purpose of the small business concessions under division 152 of the ITAA 1997?

Answer

Yes

Issue 2

Personal Disturbance Payment

Questions 1

Will the receipts for personal disturbance be disregarded as capital gain under section 118-37 of the ITAA 1997?

Answer

Yes

Issue 3

Other Disturbance Payments

Question 1

Do the receipts for other Disturbance Payments constitute a reduction of the cost base of the property under s110-40 or s110-45 of the ITAA 1997?

Answer

Yes

Issue 4

Reimbursement of professional costs

Question 1

Is the reimbursement of professional costs (legal and accounting advisers) of $xxxxx to the landowner assessable income under S6-5 of the ITAA 1997?

Answer

No

This ruling applies for the following period(s)

Income year ended 30 June 2014

The scheme commences on

1 July 2013

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

• Compensation Agreement

You are the landowners of a property you use to carry on a business. You have entered into an agreement to be compensated by a company for private infrastructure to be constructed on your property.

You reside on the property as does an associate and their family. The significant direct and indirect impact of the construction activity on the two families was taken into account during the negotiation of the compensation agreement.

The compensation agreement essentially consists of two agreements, one being the agreement in relation to the easement and one in relation to compensation that is payable under Petroleum and Gas (Production and Safety) Act 2004 (QLD) (PAGA) for the impact that the construction activity has on the land and people associated with the land.

Under this agreement payments were made for compensation for both the easement and the disturbance caused by the activities to the remainder of your land.

Additionally payments were made by the company directly too legal and accounting firms for the professional costs of entering into the compensation agreement.

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)

Income Tax Assessment Act 1997 paragraph 118-37(1)(b)

Petroleum and Gas (Production and Safety) Act 2004 (QLD) section 532

State Development and Public Works Organisation Act 1971

Reasons for decision

Summary

The compensation for easement relate primarily to the disposal of part of an underlying asset being the right attached to the land. Therefore CGT event A1 occurs on payment of the compensation and you will make a capital gain subject to the general discount and the small business concessions.

The personal disturbance relates primarily to a payment for surrendering right to seek compensation for the adverse impacts of the activities on your land such as dust and noise, this right relates to a personal wrong, injury or illness which you have suffered personally and with be therefore be disregarded under paragraph 118-37(1)(b) of the ITAA 1997.

The remaining disturbance payments primarily relate to compensation for the loss of use and diminish in value of an underlying asset being the property. As there is no disposal of this underlying asset the payment will act as a reduction to the cost base of the relevant asset under s110-55(6) of the ITAA 1997 as a recoupment.

The reimbursements of the professional costs will not be assessable income as each the payments were made directly by the company to the accounting and legal professionals and it was the company and not the landholder that was liable for those expenses under the PAGA.

Detailed reasoning

Compensation Payments Generally

The PAGA gives power for the tenement holder to compensate eligible claimants who own the land under the petroleum authority. The PAGA also defines compensable effects to include the deprivation of possession of its surface, diminution of its value, diminution of the use made, or that may be made, of the land or improvement on it, severance of any part of the land from other parties, any cost or loss arising from the carrying out of activities under the petroleum authority on the land.

Compensation paid due to loss and damage of a capital asset, or forging a right to sue, in the process of mining authority entering and accessing minerals and resources, is an isolated transaction. Taxation Ruling TR 92/3 provides that in the Commissioner's View an isolated commercial transaction will only be assessable under section 6-5 of the ITAA 1997 where both of the following exist:

a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and the transaction was entered into, and

b) the profit was made, in the course of carrying on business or in carrying out a business operation or commercial transaction.

Neither element as noted above, apply in the circumstances of receiving compensation where a tenement holder exercises its power to accesses and use a claimants land under the PAGA. Accordingly the payment will not be assessable as ordinary income.

The compensation payments will still be assessable as a capital gain. Taxation Ruling TR 95/35 provides the Commissioner View on the taxation implications of compensation receipts. According 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.

Once the relevant asset is identified it is then appropriate to determine as to whether there is an actual or part disposal of the asset. If there is a disposal of the asset then the compensation will represent consideration received for the disposal of the asset. If in the alternative there is no disposal the amount will represent a recoupment of purchase price under s110-55(6) of the ITAA 1997.

Option fee, execution fee and the easement price

In this instance it is noted that the state government has granted the particular project significance status. This status grants the company the power to call on the state to grant it compulsory acquisition powers under the section 125 of the State Development and Public Works Organisation Act 1971. Taxation Ruling TR 97/3 provides:

9. The acquisition of an easement by a public authority using the compulsory process provided in the relevant statute culminates in a declaration by notice in the Gazette that the easement has been acquired. However, it is possible that a public authority may acquire an easement by agreement with the landowner. One of the features which the various statutes have in common is encouragement of acquisition by agreement.

10. Because the easement is created in these circumstances by grant by the landowner there is scope for an argument that subsection 160M(6) applies. However, because the grantee of the easement (the public authority) has available, if it chooses to exercise it, the power to compulsorily acquire the easement, the amount received, in our view, takes on the same character as compensation for a compulsorily acquired easement. It is therefore appropriate that Part IIIA apply in the same way, that is, the consideration (compensation) is paid in respect of the part disposal of the land and not in respect of the grant of the easement.

It follows from the above that the receipts will be treated as compensation for the part disposal of the underlying asset being the land. Consequently CGT event A1 has occurred, there has been a disposal of a CGT asset namely rights held over the land for example the right of exclusion.

As there has been a compulsory acquisition no new asset has been created with the granting of the easement, rather rights relating to the land of have been disposed of, these rights have been held for longer than 12 months so you will be eligible to the general discount under division 115 of the ITAA 1997.

It is clear that the compensation relates to an underlying asset in this instance the land. Section 152-40(1) of the ITAA 1997 provides the following definition of an active asset:

It is clear from the above definition that the land from which the rights flow will be an active asset, additionally these rights will be an active asset in their own right as they are an intangible asset inherently connected to the business of farming the land. Consequently if the other requirements of division 152 of ITAA 1997 are met you will be able to access the small business concession.

Personal Disturbance

Having regard to your full circumstances of the personal disturbance payment, it is accepted that you have been compensated primarily for surrendering your right to seek compensation for noise, dust, and other negative impacts cause by the activities of the company.

Consequently the compensation payments will not be assessable income under section 6-5 of the ITAA 1997 as the payments do not relate to an underlying asset, but rather relates to a disposal by the taxpayer of the right to seek compensation which is capital in nature.

In this instance the surrendered right to seek compensation relates to a personal wrong, injury or illness which you have suffered personally and with be therefore be disregarded under paragraph 118-37(1)(b) of the ITAA 1997.

Other Disturbance Payments

While certain aspects of the various disturbance payments would suggest a revenue nature, however having regard to your full circumstances, it is accepted that you have been compensated primarily for the loss of use and diminish in value of an underlying asset being the property.

Further in support of this position is that the payments have been made under the PAGA, which at section 532 defines the compensable effects by which the holder of the petroleum authority is liable to compensate the landowner for as:

(a) all or any of the following relating to the eligible claimant's land

(i) deprivation of possession of its surface;

(ii) diminution of its value;

(iii) diminution of the use made or that may be made of the land or any improvement on it;

(iv) severance of any part of the land from other parts of the land or from other land that the eligible claimant owns;

(v) any cost, damage or loss arising from the carrying out of activities under the petroleum authority on the land;

(b) accounting, legal or valuation costs the claimant necessarily and reasonable incurs to negotiate or prepare a conduct and compensation agreement…

As previously stated 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) as a recoupment of purchase price.

Reimbursement of profession costs

Section 6-5 of ITAA 1997 provides that assessable income is income according to ordinary concepts. While ordinary concepts of income is not defined within the act but must be referenced with the common law.

In the case HR Sinclair & Son Pty ltd v FC of T (1996) 114 CLR 537 supports the proposition where expenses that would ordinarily be deductable are reimbursed that reimbursement will amount to assess income.

However in this circumstance no deductible expense has been incurred by the landholder, as the payment were made directly to the legal and accounting firms from the company. Section 532(4)(b) of PAGA provides that it is the holder of the petroleum authority that is liable to pay the costs related to negotiating and preparing a conduct and compensation agreement. Consequently the payments will not amount to assessable income.