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Edited version of your written advice
Authorisation Number: 1012831637788
Date of advice: 2 July 2015
Ruling
Subject: CGT - mining compensation
Question 1
Will the compensation payment under the Mining Lease Compensation Agreement "the Agreement" be assessable as income or a capital gain?
Answer
No.
Question 2
Will the compensation payment under the Agreement reduce the cost base of the relevant property for any future capital gain?
Answer
Yes.
Question 3
To the extent that any recoupment of the purchase price exceeds the cost base of the property, will the excess be a taxable capital gain?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2014 til year ended 30 June 2020
The scheme commences on
1 July 2013
Relevant facts and circumstances
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
• The application for private ruling
• The Mining Lease Compensation Agreement "the Agreement/s"
You are the landowner of property and use the land to carry on a business.
You have entered into a compensation agreement with a company to compensate you for the construction on and use of a portion of your land.
The contract details the Agreed Authorised Activities relevant to the damages caused.
The Agreement in conjunction provides that you have been compensated for the following heads of damage:
• deprivation of possession of its surface;
• diminution of its value;
• diminution of its use or any improvements;
• severance of any part of the land from other parts of the land;
• any surface rights of access; and
• all loss or expense that arise
as a consequence of the use of the 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 Subsection 110-55(6)
Reasons for decision
Taxation Ruling TR 95/35 provides the Commissioner's view on the taxation implications of compensation receipts. Accordingly, 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 you have been compensated primarily for the reduction in value to an underlying asset, being the property.
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 relate to a capital asset.
In this instance where there is no disposal of the underlying asset the receipts will instead amount to a reduction of the cost base of the relevant asset under section 110-55(6) of the ITAA 1997 as a recoupment of the purchase price.
Additionally paragraph 133 of TR 95/35 provides that any recoupment that exceeds the cost base of the property will not represent a taxable capital gain and, there will be no capital gains tax consequences in respect of any excess.