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Edited version of your written advice
Authorisation Number: 1012760130389
Ruling
Subject: Mining compensation
Question 1
Will the compensation payments (annual and lump sum) be assessable as ordinary income as defined by section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
Question 2
Will compensation payments represent capital proceeds of any CGT event in Division 104 of the ITAA 1997?
Answer
No
Question 3
Will the compensation payment reduce the cost base of the relevant property for any future capital gain under section 110-40 or s110-45 of the ITAA 1997?
Answer
Yes
Question 4
To the extent that any recoupment of purchase price exceeds the cost base of your property will it be a taxable capital gain?
Answer
No
Question 5
Will the amount received as a reimbursement of legal, accounting and valuation costs be assessable as either ordinary income or statutory income?
Answer
No
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
On or after 1 July 2014
Relevant facts and circumstances
You are a landowner of a property used in a primary production business.
You have entered into an agreement to receive compensation under a statutory authority from a company building infrastructure on your property.
The infrastructure will cause permanent damage to your 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 section 110-40
Income Tax Assessment Act 1997 section 110-45
Reasons for decision
Compensation Payments
X establishes a statutory scheme to provide compensation to landowners for the impacts of petroleum and gas production activities; and requires the relevant parties to enter into a CCA. The purpose of the scheme is to ensure that landowners are not financially disadvantaged by activities carried out on their property. Landowners are entitled to compensation for any compensatable effects related to the impact of the activities on their business operations and land use.
Payments pursuant to X are generally treated as capital in nature where those amounts are compensation payments for compensatable effects. It is considered that characterising the payments as capital in nature is in keeping with the ATO view on the taxation treatment of compensation receipts contained in Taxation Ruling TR 95/35. For the purposes of TR 95/35 it is necessary to identify the underlying asset. TR 95/35 defines an underlying asset:
The underlying asset is the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity.
If there is more than one underlying asset, the relevant underlying asset is the asset which leads directly to the payment of the amount of compensation. For example, if a taxpayer receives an amount of compensation for the destruction of his or her truck, the truck is the underlying asset.
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 to identifying the underlying asset in the current context. 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.
Paragraph 6 of TR 95/35 provides that it is the Commissioner's view that where an amount of compensation is received wholly in respect to permanent damage suffered to a CGT asset of the taxpayer and there is no disposal of the asset, the compensation represents a recoupment of purchase price. The total acquisition costs for the relevant asset should be reduced by the amount of compensation received under section 110-40 or 110-45 of the ITAA 1997.
We consider that you have been compensated under section 532 of X primarily for permanent damage to an underlying asset being your property. As the property is not being disposed of, the compensation will reduce the cost base of the property for any future capital gain.
Reimbursement of expenses
Section 6-5 of ITAA 1997 provides that assessable income is income according to ordinary concepts. While ordinary concepts of income is not defined within the act but must be referenced with the common law.
In the case HR Sinclair & Son Pty ltd v FC of T (1996) 114 CLR 537 supports the proposition where expenses that would ordinarily be deductable are reimbursed that reimbursement will amount to assessable income.
However in this circumstance no deductible expense has been incurred by the landholder. Section 532(4)(b) of the X provides that it is the holder of the petroleum authority that is liable to pay the costs related to negotiating and preparing a conduct and compensation agreement. Consequently the payments will not amount to assessable income.