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Edited version of private advice
Authorisation Number: 1012632484238
Ruling
Subject: Mining Compensation
Question 1
Will the compensation payments under the proposed Conduct and Compensation Agreement "the Agreement" be assessable as income or a capital gain?
Answer
No
Question 2
Will the compensation payments 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
Income year ended 30 June 2015
Income year ended 30 June 2016
Income year ended 30 June 2017
Income year ended 30 June 2018
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 received late May 20XX
• The Conduct and Compensation Agreement "the Agreement"
You are the owner of a property which you use in your primary production business.
You have entered into a compensation agreement under the Petroleum and Gas (Production and Safety) Act 2004 with a company to compensate you for a mining activities occurring on your property.
The contract details the Agreed Authorised Activities relevant to the damages caused.
Clause x of the Agreement in conjunction with section 532 and 532 of the Petroleum and Gas (Production and Safety) Act 2004 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.