Edited version of your written advice

Authorisation Number: 1012841589320

Date of advice: 20 July 2015

Ruling

Subject: Grant of easement

Question 1

Will the additional payments form part of the capital proceeds under section 116-20 of the Income Tax Assessment Act 1997 (ITAA 1997) for the capital gains tax (CGT) event A1 that occurred when you granted the easement?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You own a rural property which you purchased prior to 20 September 1985. The property is used as farm land in a primary production business you carry on.

During the relevant financial year, you entered into an Option for Easement with a mining company in relation to creating an easement on your property to construct a pipeline.

You signed the easement agreement and the option was exercised.

You have received the following additional payments:

• additional payment during the 20XX financial year

• an additional discretionary payment during the 20XX financial year

• an advance compensation payment received during the 20YY financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 103-25.

Income Tax Assessment Act 1997 Section 104-10.

Reasons for decision

Compensation Payments

Taxation Ruling TR 95/35 provides the ATO view in relation to the treatment of compensation receipts. Paragraph [6] states that:

If an amount of compensation is received by a 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 that 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.

For the purposes of TR 95/35 it is necessary to identify the underlying asset. TR 95/35 defines an underlying asset at paragraph [3]:

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.

It is considered that 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 in this relation to identifying the underlying asset in respect of compensation paid by mining and gas companies. 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 [4] of TR 95/35 provides that if 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.

Granting of an easement

Taxation Ruling 97/3 provides the Commissioner's view on the compensation received from a public authority for the compulsory acquisition of an easement. While the company is not a public authority, the state government has granted the pipeline project 'significant statues' through the publication of the Gazette Notice No. 13.

The effect of the above is that it gives the mining company the power to call on the state to grant it compulsory acquisition powers under section 125 of the State Development and Public Works Organisation Act 1971. Taxation Ruling TR 97/3 provides:

9. The acquisition of an easement by a public authority using the compulsory process provided in the relevant statute culminates in declaration by notice in the Gazette that the easement has been acquired. However, it is possible that a public authority may acquire an easement by agreement with the landowner. One of the features which the various statutes have in common is encouragement of acquisition by agreement.

10. Because the easement is created in these circumstances by grant by the landowner there is scope for an argument that subsection 160M (6) applies. However, because the grantee of the easement (the public authority) has available, if it chooses to exercise it, the power to compulsorily acquire the easement, the amount received, in our view, take on the same character as compensation for a compulsorily acquired easement. It is therefore appropriate that Part IIIA apply in the same way, that is, the conisation (compensation) is paid in respect of the part disposal of the land and not in respect of the grant of the easement.

Application to your circumstances

It is considered in your circumstances that the additional payments are received in respect of the granting of the easement. This is made clear by the deed which provides that if the compensation amount is in excess of the easement purchase price then the easement purchase price will be increased to the compensation amount.

Even if the compensation amount was calculated under a different method such as a reduction in the livestock we would still consider the payment to still be in respect of the granting of the easement. As per the Commissioner's view in TR 97/3 the granting of an easement is a part disposal of the land and consequently a CGT event A1.

Consequently additional payments will form part of the capital proceeds of CGT event A1 that occurred when you granted the easement as per the Commissioner's view in TR 95/35.

As the mining company had compulsory acquisition powers no new asset is created with the granting of the easement. Rather there has been a part disposal of the land being the rights associated with your ownership of the land.

As the land was purchased prior to 20 September 1985, any capital gain will be disregarded.