Edited version of private advice

Authorisation Number: 1012645004959

Ruling

Subject: Mining Compensation

Question 1

Will the payment under the Compensation Deed (the Agreement) for adverse health effects be disregarded as a capital gain under section 118-37 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the payment under the Agreement for adverse value and traffic effects be assessable as income under section 6-5 of the ITAA 1997 or a capital gain under section 104-10 of the ITAA 1997?

Answer

No

Question 3

Will the payment under the Agreement for adverse value and traffic effects reduce the cost base of the relevant property under section 110-40 or section 110-45 of the ITAA 1997?

Answer

Yes

Question 4

To the extent that any recoupment of the purchase price exceeds the cost base of the property, will it be a taxable capital gain?

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 Deed between you and the company "the Agreement".

You are the landowners of a property and primarily carry on a farming business.

A company operates a mine approximately x kilometres north of your property.

You have suffered adverse impacts due to the activities of the mine and the mining related traffic using a road that runs along the edge of your property.

After a legal dispute over the lease of the land used for the haul road, you have entered into a compensation agreement under a statutory authority with the company to compensate you for the adverse traffic effects, adverse health effects and adverse value affects you suffered.

Adverse Traffic Effects, Adverse Value and Adverse Health effects are defined under the agreement.

Under the Agreement you have acknowledged that this is full and final satisfaction of any compensation payable under the statutory authority or the common law.

The company has also agreed to purchase the property including land, buildings and water licences but will allow you to continue to occupy and use the property for a maximum period of 10 years. You have provided that there were separate distinct negotiations for the purchase of the property and for the compensation agreement.

A total compensation payment has been made of $x but no value has been assigned for each label. You are proposing engaging valuation and medical professions to divide the sum. For the purpose of the ruling you have provided it as a fact that an amount of $x is to be paid in regard to health effects and $x for reduction of value of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

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

Reasons for decision

Compensation Receipts Generally

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.

Adverse Health Effects

Having regard to your full circumstances, it is accepted that you have been compensated primarily for surrendering your right to seek compensation for the dust, noise and other adverse impacts of the company's mining activities which have negatively affected your health.

Consequently the compensation payments will not be assessable income under section 6-5 of the ITAA 1997 as the right to seek compensation does not relate to any loss of income or have any of the other characteristics of ordinary income.

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

Adverse Traffic and Value Effects

Having regard to your full circumstances, it is accepted that you have been compensated primarily for the reduction in the value to an underlying asset being the property.

Consequently the compensation payments will not be assessable income under section 6-5 of the 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 or assessable income.