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Edited version of your written advice
Authorisation Number: 1012768530205
Ruling
Subject: Compensation payment
Question 1
Will the payment received under the deed of release be assessable as ordinary income or a capital gain?
Answer
No
Question 2
Will the payment received under the deed of release reduce the cost base of the property?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You own a property that borders a highway.
A bridge is being constructed in the area, and as a result of the construction it is predicted that your property will be prone to additional flooding.
You have entered into a deed of release with the relevant authority. Under the deed you receive a payment of $X as compensation for the possible future flooding that may affect your 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 Subsection 110-55(6)
Reasons for decision
Taxation Ruling TR 95/35 provides the Commissioner's view on the taxation implications of compensation receipts. 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 the compensation payment will relate to the permanent reduction in value of your property due to an increased risk of flooding.
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 will be of a capital nature.
We consider that the payment under the deed of release will relate wholly to the permanent reduction in value of the property. In this instance, as there is no disposal of the underlying asset, the total payment will amount to a reduction of the cost base of the relevant property under section 110-55(6) of the ITAA 1997 as a recoupment of the purchase costs.