Edited version of your written advice

Authorisation Number: 1012778392888

Ruling

Subject: Mining Compensation

Question 1

Will the payments received under the compensation agreements be assessable as ordinary income under section 6-5 or section 15-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the payments represent the capital proceeds of any capital gains tax (CGT) event under Division 104 of the ITAA 1997?

Answer

No

Question 3

Will the payments received under the compensation agreements represent a recoupment of the cost base of a pre-CGT asset and consequently have no further CGT implications?

Answer

Yes

This ruling applies for the following period(s)

Income year ended 30 June 2012

Income year ended 30 June 2013

The scheme commences on

1 July 2011

Relevant facts and circumstances

You are the landowner who owns properties which are used to carry on a primary production business. The relevant properties were acquired prior to 20 September 1985.

X & Y hold the exploration licences over the relevant properties. You have entered into the following agreements:

• Land Access Agreement with X

• Land Access Agreement with Y

Both of the agreements are 'land access agreements' under a statutory authority. The land access agreement provide for an amount of consideration for the adverse effects of the activities authorised under the agreements.

The relevant statutory authority provides a definition of compensable loss to which a landowner is entitled too.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 110-40

Income Tax Assessment Act 1997 section 110-45

Reasons for decision

The statutory authority establishes a statutory scheme to provide compensation to landowners for the impacts of mining and exploration activities; and requires the relevant parties to enter into a Access Agreement. 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 compensable effects related to the impact of the activities on their business operations and land use.

Payments pursuant to the statutory authority are generally treated as capital in nature where those amounts are compensation payments for compensable 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 x of the statutory authority primarily for permanent damage and reduction in value to an underlying asset being your farming properties. As the properties are not being disposed of and the relevant assets are pre-CGT properties there will be no further taxation consequences of the amount paid under the agreements.