Edited version of your written advice

Authorisation Number: 1012829029072

Date of advice: 2 July 2015

Ruling

Subject: Mining compensation

Question 1

Will the compensation payment for permanent damage or reduction in value of the property 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 payment for permanent damage or reduction in value of the property represent capital proceeds of any capital gains tax (CGT) event in Division 104 of the ITAA 1997?

Answer

No.

Question 3

Will the compensation payment for permanent damage or reduction in value of the property 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 compensation payment for visual, noise and dust impacts represent capital proceeds of any CGT event in Division 104 of the ITAA 1997?

Answer

Yes, CGT event C2.

Question 6

Will the resulting capital gain be disregarded as a personal wrong under section 118-37 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are the landowner of a property which you use to carry on a primary production business.

You have entered into a Conduct and Compensation Agreement (CCA) under the relevant legislation with a mining company to compensate you for mining related activities carried out on your property.

The CCA details the agreed authorised activities relevant to the damages caused.

The CCA along with the relevant legislation provides that you have been compensated for the following heads of damage:

• deprivation of possession of its surface;

• diminution of its value;

• severance of any part of the land from other parts of the land;

• any cost, damage or loss arising from the carrying out of the activities under the petroleum authority on the land

• legal, account and valuation costs incurred in negotiation the CCA.

You have received the following compensation for the following:

• permanent damage or reduction in value of the property;

• visual, noise and dust impacts.

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.

Income Tax Assessment Act 1997 Section 104-25.

Income Tax Assessment Act 1997 Section 118-37.

Reasons for decision

Compensation Payments

The relevant legislation establishes a statutory scheme to provide compensation to landowners for the impacts of mining 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 a CCA 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. As per the Commissioner view in paragraph 133 the cost base of the asset can only be reduced to nil, and there is no taxation consequence of the excess recoupment.

Compensation for permanent damage or reduction in value of the property

We consider that you have been compensated under the relevant legislation 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.

Compensation for visual, noise and dust impacts

Paragraph 11 of TR 95/35 Provides that it is the Commissioner's view that where an amount of compensation is not received in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation with C2 being the relevant CGT event.

Having regard to your full circumstances, it is accepted that you have been compensated for surrendering your right to receive compensation under the relevant legislation for private nuisance from dust, noise and personal inconvenience caused by the activities of the mining company on your land.

Normally, a payment for surrendering the right to seek compensation would be assessable as a capital gain however, in this instance, the right relates to a wrong, injury or illness which you have suffered personally and will therefore be disregarded under paragraph 118-37(1)(b) of the ITAA 1997.