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Edited version of private advice
Authorisation Number: 1012632383787
Ruling
Subject: Mining Compensation Payments
Question 1
Will the compensation payment under the proposed Conduct and Compensation Agreement "the Agreement" be assessable as income or a capital gain?
Answer
No
Question 2
Will the compensation payment under the Agreement reduce the cost base of the relevant property for any future capital gain?
Answer
Yes
Question 3
To the extent that any recoupment of the purchase price exceeds the cost base of the property, will the excess be a taxable capital gain?
Answer
No
This ruling applies for the following period(s)
Income year ended 30 June 2014
Income year ended 30 June 2015
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
• The proposed Conduct and Compensation Agreement
You are the landowner of a property and carry on a business on that property.
You have entered into a compensation agreement under a statutory authority with a company to compensate you for mining activities being undertaken on that land.
The contract details the Agreed Authorised Activities relevant to the damages caused.
Clause x of the Agreement in conjunction with the statutory authority provides that you have been compensated for the following heads of damage:
• deprivation of possession of its surface;
• diminution of its value;
• severance of any part of the land from other parts of the land;
• any cost, damage or loss arising from the carrying out of activities under the petroleum authority on 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. 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 the reduction in value to 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.
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 the purchase price.
Additionally, paragraph 133 of TR 95/35 provides that any recoupment that exceeds the cost base of the property will not represent a taxable capital gain and, there will be no capital gains tax consequences in respect of any excess.