Edited version of your written advice

Authorisation Number: 1012791385234

Ruling

Subject: Capital gains tax

Question 1

Are the proceeds from the grant of the easement over the property assessable income under section 6-5 or section 15-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the compensation payment relating to the construction of the pipeline assessable income under section 6-5 or section 15-5 of the ITAA 1997?

Answer

No.

Question 3

Are the proceeds from the sale of the property assessable income under section 6-5 or section 15-5 of the ITAA 1997?

Answer

No.

Question 4

Will the proceeds from the grant of the easement over the property be taken into account under the capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997??

Answer

Yes.

Question 5

Will the compensation payment relating to the construction of the pipeline reduce the cost base of the property?

Answer

Yes.

Question 6

Will the proceeds from the sale of the property be taken into account under the CGT provisions in Part 3-1 of the ITAA 1997??

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

29 March 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you

You were appointed as statutory trustee for the sale of the property during the 2009-10 financial year.

The property is a rural holding.

The property was transferred to you during the 2009-10 financial year.

In your capacity as trustee for sale, you:

(a) Received compensation after an easement was taken over part of the property. The easement was compulsorily acquired. The proceeds less costs were distributed to the beneficiaries;

(a) You have entered into a Conduct and Compensation Agreement (CCA) where you will be compensated for the construction of a pipeline over part of the property; and

(b) Sold the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 15-15.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 104-55.

Income Tax Assessment Act 1997 subsection 110-25(2).

Income Tax Assessment Act 1936 Section 161.

Reasons for decision

Summary

The dealings with the land are on capital account and are not ordinary income.

Detailed reasoning

Income

Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Additionally, section 15-15 of the ITAA 1997 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997, or which arises in respect of the sale of property acquired on or after 20 September 1985.

Although the legislation does not define income according to ordinary concepts, a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income. 

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

• those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

• those transactions entered into by non business taxpayers.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present:

• your intention or purpose in entering into the transaction was to make a profit or gain, and

• the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

In this case, you were appointed as statutory trustee to sell the property. Your intention as the statutory trustee was to sell the property and distribute the proceeds to the relevant parties as per the court order. There was no profit making intention in your capacity of statutory trustee. Therefore, the proceeds from the easement, construction of the pipeline and the sale of the property are not ordinary income.

Capital gains

Land, or an interest in land, is a capital gains tax (CGT) asset under section 108-5 of the ITAA 1997.

The sale of an asset is a disposal which gives rise to CGT event A1. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

Easement

Taxation Ruling TR 95/35 considers the treatment of compensation payments and the capital gains tax (CGT) consequences for the recipient. TR 95/35 states that the particular asset for which compensation has been received by the taxpayer may be:

• an underlying asset;

• a right to seek compensation; or

• a notional asset in terms of section 104-155 of the ITAA 1997.

In determining which is the most relevant asset, it is often appropriate to adopt a 'look through' approach to the transaction or arrangement which generates the compensation receipt.

'Underlying asset' is defined as 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 (TR 95/35).

Paragraph 4 of TR 95/35 provides that where an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation.

Taxation Ruling TR 97/3 extends the application of TR 95/35 in respect of compensation receipts received from public authorities. Where compensation is received for the compulsory acquisition of an easement by a public authority, the compensation cannot be said to be received for the grant of the easement. Rather, TR 97/3 concludes that an amount of compensation received by a landowner for the loss of part of the rights of ownership is accepted as being consideration received in respect of the part disposal of the underlying asset (the land).

Paragraphs 9 and 10 of TR 97/3 provide that even where the easement is acquired by agreement with the landowner the Commissioner takes the view that the compensation received takes on the same character as an amount paid in relation to a compulsorily acquired easement. This is because the grantee of the easement (the public authority) has available; if it chooses to exercise it, the power to compulsorily acquire the easement.

In this case, an easement over the property was compulsorily acquired. In accordance with TR 97/3 this will be treated as a partial disposal of the property and CGT event A1 will occur. Any potential capital gain or loss is determined in accordance with Part 3-1 of the ITAA 1997.

Compensation for pipeline

As discussed above, TR 95/35 considers the CGT consequences of compensation payments. Paragraphs 6 to 9 of TR 95/35 provide the following guidelines on the treatment of compensation for permanent damage to or permanent reduction in the value of the underlying asset:

If an amount of compensation is received by the taxpayer wholly in respect of permanent damage suffered to a post-CGT underlying asset of the taxpayer or for a permanent reduction in the value of a post-CGT underlying asset of the taxpayer, and there is no disposal of the underlying asset at the time of the receipt, we consider that the amount represents a recoupment of all or part of the total acquisition costs of the asset.

Accordingly, the total acquisition costs of the post-CGT asset should be reduced in terms of section 110-25 of the ITAA 1997 by the amount of the compensation.  No capital gain or loss arises in respect of that asset until the taxpayer actually disposes of the underlying asset.

The adjustment of the total acquisition costs effectively reduces those costs by the amount of the recoupment as if those costs had not been incurred.

Compensation received by a taxpayer has no CGT consequences if the underlying asset which has suffered permanent damage or a permanent reduction in value was acquired by the taxpayer before 20 September 1985 or is any other exempt CGT asset.

In this case, you received a compensation payment in relation to a pipeline that was constructed over part of the property. The property was not disposed of at that time. We consider that the compensation payment related to the permanent reduction in the value of the property as a result of the construction of the pipeline. Accordingly, the cost base of the property will be reduced as described in TR 95/35.

Disposal

When you disposed of the property, CGT event A1 occurred. Any potential capital gain or loss is determined in accordance with Part 3-1 of the ITAA 1997.