Edited version of your written advice

Authorisation Number: 1012720345533

Ruling

Subject: Compensation

Issue 1

Ex Gratia Payment

Question 1

Will the ex gratia payments from a public authority and the joint venture be assessable as ordinary income?

Answer

No

Question 2

Will the ex gratia payments from a public authority and the joint venture be assessable as a capital gain?

Answer

No

Issue 2

Easement

Question 1

Will the option fee and the compensation received in relation to the granting of the easement be assessable as ordinary income?

Answer

No

Question 2

Will the option fee and the compensation received in relation to the granting of the easement be capital proceeds from CGT event A1?

Answer

Yes

Issue 3

Temporary Lease

Question 1

Will the payment from the contractor to use part of your land to store materials be assessable as ordinary income?

Answer

No

Question 2

Will the payment the contractor to use part of your land to store materials be capital proceeds from CGT event D1?

Answer

Yes

This ruling applies for the following period(s)

Income year ended 30 June 2014

The scheme commences on

1 June 20XX

Relevant facts and circumstances

You and your parent own a property.

You use this property for a primary production business.

The joint venture negotiated with you for an extended period to construct an item of infrastructure on your property.

The infrastructure project did not proceed.

The state government and the joint venture have paid you compensation of $x and $x respectively for inconvenience and disruption.

You had to submit an application to receive both payments.

Separately another public authority has installed another item of infrastructure on your property.

You granted an easement to the public authority and were paid an option fee of $x and compensation of $x.

The public authority had the power to compulsorily acquire your land.

A contractor for the public authority also paid you $x for the right to store materials on your land.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 116-20

Reasons for decision

Issue 1 Compensation

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

A compensation payment will generally take the same character as what it replaces. Consequently compensation for the loss of earning or other income flow will generally be characterised as ordinary income, while compensation for the loss or substantial impairment of a capital asset will generally be characterised as capital.

Taxation Ruling TR 95/35 provides the Commissioner's view on the capital gains tax 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 regarded to your full circumstances it is considered that you have been compensated primarily for the personal inconvenience suffered in the drawn out negotiations.

Consequently, the compensation payments will not be assessable income under section 6-5 of the ITAA 1997 as the payments do not relate to any loss of income. Further the payments will not be assessable as a capital gain as the relevant asset is the right to seek compensation for personal inconvenience, which is a wrong which you have suffered personally and is therefore disregarded under section 118-37 of the ITAA 1997.

Issue 2 Easement

In this instance it is noted that the public authority has 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 the Commissioner view on the CGT consequence of granting an easement where the public authority has the power to compulsorily acquire the land, at paragraph 9 and 10:

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 your farming property. Consequently CGT event A1 has happened, there has been a disposal of a CGT asset namely rights held over the land for example the right of exclusion. Therefore the option fee and the compensation received in relation to the easement will be capital proceeds from that event.

Issue 3 Temporary Lease

To determine whether the receipt of the incentive payment has the character of ordinary income assessable under section 6-5 of the ITAA 1997 or capital proceeds assessable under the CGT regime in Part 3.1 of the ITAA 1997, regard must be had to the totality of your situation and the common law indicators determined by the courts. In GP International Pipecoater Pty Ltd v FCT (1990) 170 CLR 2124; 21 ATR 1 the High Court summarised the relevant indicators, at 1,7:

Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. The factors relevant to the ascertainment of the character of a receipt of money are not necessarily the same as the factors relevant to the ascertainment of the character of its payment.

It is considered that a one off payment received from the contractor for the right to use your land will be capital in nature and therefore assessable under the CGT regime as opposed to ordinary income.

CGT event D1 happens if a taxpayer creates a contractual right or other legal or equitable right in another entity (subsection 104-35(1) of the ITAA 1997). A capital gain will arise on CGT event D1 happening if the capital proceeds from creating the right are more than the incidental costs you incurred that relate to the event.

In your situation CGT event D1 has happened when you have granted the contractor the right to use your land to store materials. Consequently the amount received from the contractor will be assessable as the capital proceeds from a CGT event.