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Edited version of your written advice
Authorisation Number: 1012858129223
Date of advice: 12 August 2015
Ruling
Subject: Mining Compensation
Question 1
Will the compensation payments (annual and lump sum) 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 payments received for water used from dams and bores be assessable as ordinary income as defined by section 6-5 of the ITAA 1997?
Answer
No
Question 3
Will compensation payments represent capital proceeds of any CGT event in Division 104 of the ITAA 1997?
Answer
No
Question 4
Will water payments represent capital proceeds of any CGT event in Division 104 of the ITAA 1997?
Answer
No
Question 5
Will the compensation payment 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 6
Will the amounts that exceed the cost base of the asset be a taxable discountable capital gain as defined by section 115-5 of the ITAA 1997?
Answer
No.
Question 7
Will the amounts that exceed the cost base of the asset be subject to the CGT active asset reduction as per section 152-205 of the ITAA 1997?
Answer
No.
This ruling applies for the following period(s)
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 2010
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 Conduct and Compensation Agreement with XXX.
A is the landowner of the property which is used to carry on a business.
A have entered into a CCA under the Petroleum and Gas (Production and Safety) Act 2004 (PAGA) with XXX to compensate for Coal Seam Gas related activities carried on A's property including the construction of gas well, infrastructure and access tracks.
The CCA details the agreed authorised activities relevant to the damages caused.
Clause 1.1 of the CCA along with section 532 of the Petroleum and Gas (Production and Safety) Act 2004 (PAGA) provides that you have been compensated for the following heads of damage:
• deprivation of possession of all or any part of the surface of the land;
• diminution in value of the Land or any improvements;
• diminution of the use made, or that may be made, of the Land and any improvements;
• the severance of any part of the land from other parts of the land or from any other land that is owned by the Landowner;
• any cost or loss arising from the carrying out of the Operations 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 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
PAGA establishes a statutory scheme to provide compensation to landowners for the impacts of petroleum and gas production 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 PAGA 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.
We consider that you have been compensated under s532 of PAGA 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.
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.
As there is no capital gains tax event, small business concessions including the active asset reduction will not apply.