Edited version of private advice

Authorisation Number: 1012659083828

Ruling

Subject: Mining Compensation

Question 1

Will the annual payment from the company under the compensation agreement be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the annual payment from the company under the compensation agreement be assessable as a capital gain under part 3-1 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-40

Income Tax Assessment Act 1997 section 104-155

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Prior to 1985 you acquired a property. At all times since owning the land you, in partnership with your parent and later your spouse have carried on a primary production partnership on the land.

In 20xx you and a company entered into various agreements where you agreed to the following:

• the parties agreed various rights and obligations between them with respect to activities on your land

• you consented to the company carrying on activities on your property

• the company agreed to pay you compensation for the adverse effect of the activities.

In accordance with the agreements, parts of the activities have been completed on a portion of your land.

In 20xx you entered into a subsequent agreement the company.

Under the agreement you received the following:

• a lump sum compensation payment of $x payable in three instalments.

• an annual compensation payment if further activities commenced on the land.

The compensation amounts were the product of length negotiation between you and the company with reference to:

• the deprivation of use of part of the natural surface of the land

• the damage to the natural surface of part of the land

• the severance of part of the land from other parts of the land

• social disruption, including traffic, noise, dust and visual pollution.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-40

Income Tax Assessment Act 1997 section 104-155

Reasons for decision

Compensation payments may be assessable as statutory income under section 6-10 of the ITAA 1997 if a capital gain tax (CGT) event has occurred. The Commissioners view on the taxation of compensation receipts is found in Taxation Ruling TR 95/35. To determine the correct tax treatment of a compensation receipt a look through approach must be adopted to determine what the most relevant asset is.

If an amount of compensation is received by a taxpayer wholly in respect of permanent damage suffered to an underlying pre-CGT asset of the taxpayer or for permanent reduction in the value of an underlying pre-CGT asset there will be no CGT consequence of the compensation payment. Alternatively if the compensation is not received in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

It is considered that the decisions in Nullaga Pastoral Company Pty Ltd v FC of T 78 ATC 4329; (1978) 8 ATR 757 and Barrett v Federal Commissioner of Taxation [1968] HCA 59; (1968) 118 CLR 666; 15 ATD 149; 10 AITR 685 are relevant in this relation to identifying the underlying asset. In both of those cases the landholders were conducting ongoing successful farming operations. The payments were held to be compensation for damage to property which formed part of the profit-yielding structure of the landholders. In keeping with Nullaga and Barrett it is considered that the relevant underlying asset in the current case is the property which forms the profit yielding structure of the taxpayer.

Having regard to your entire circumstances we have determined that the compensation receipt relates primarily to reduction in value and permanent damage of an underlying asset being your property which forms part of your profit yielding structure. In reaching this conclusion we have had regard to the following

• compensation under the statutory authority is only available to you by virtue of your ownership of the land.

• the large majority of the heads of damage for which you can receive compensation under the statutory authority relate to the land:

• being deprived of possession or use, or any particular use, of the natural surface of the land or any part of the land

• damage to the land or any part of the land

• severance of the land or any part of the land from other land of, or used by, that person

• any loss or restriction of a right of way or other easement or right

• the loss of, or damage to, improvements

• social distribution

• in the case of private land that is land under cultivation, an substantial loss of earnings, delay, loss of time reasonable legal or other costs of negotiation, disruption to agricultural activities, disturbance of the balance of the agricultural holding, the failure on the part of a person concerned in the mining to observe the same laws or requirement in relation to that land as regards spread of weeds, pest, disease, fire or erosion, or as to soil conservations practices, as are observed by the owner or occupier of that land

• any reasonable expense property arising from the need to reduce or control the damage or arising from the mining.

• The activities being conducted by the company will clearly cause permanent damage or reduction in value to the property. As per paragraph 3 of TR 95/35 permanent damage or reduction in value does not mean everlasting damage or reduced value, but refers to damage or a reduction in value which will have permanent effect unless some action is taken by the taxpayer to put it right.

• In your affidavit you have sworn on oath that:

• prior to negotiating the agreement you engaged the services of a real estate agent who advised you that land values in the area had increased by a multiple of more than 3

• you consequently went into negotiations on the basis that the compensation paid under the Agreement should be increased by a multiplier of 3

• you were later negotiated down to a lump sum payment and an amount per annum which over the expect 40 years of operation would represent a multiplier of 2.4.

From the above it is considered that the connection between the compensation receipt and the land is clear. Consequently the payments will represent a recoupment of purchase price and as the asset in question was a pre CGT asset there will be no taxation consequence of the compensation receipt.