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Edited version of your written advice
Authorisation Number: 1012867255401
Date of advice: 27 August 2015
Ruling
Subject: Mining compensation
Question 1
Will the payment under the Make Good Agreement "the Agreement" be assessable as income or a capital gain?
Answer
No.
Question 2
Will the full payment reduce the cost base of the relevant property for any future capital gain?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commences on:
1 July 2015
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 cannot rely on it. The fact sheet has more information about relying on your private ruling.
You are the joint landowners of a property which you use to carry on a primary production business.
You have entered into a compensation agreement under the Water Act 2000 with a mining company to compensate you for the decommissioning of a water bore on your land.
The contract details the Agreed Authorised Activities relevant to the damages caused.
The mining company is the responsible tenure holder for the bore.
As a result of the mining company exercising its underground water rights under the relevant mining legislation, the mining company have advised that the bore is likely to have an "impaired capacity".
The term "impaired capacity" has a specific meaning in this context being its definition set out in section 412 of the Water Act 2000, namely:
"An existing water bore has an impaired capacity if:
(a). there is a decline in the water level of the aquifer at the location of the bore because of the exercise of underground water rights; and
(b). because of the decline, the bore can no longer provide a reasonable quantity or quality of water for its authorised use or purpose."
Under the Water Act 2000 the mining company must enter into a Make Good Agreement (the agreement) with the bore owner. A Make Good Agreement has been negotiated and an offer of compensation under the agreement has been proposed of a lump sum payment.
Under the agreement, certain make good measures are to be undertaken by the mining company including-
i. The payment of compensation to the Landowner; and
ii. Decommissioning activities.
The term "decommissioning activities" is defined in Schedule 3 to the agreement to include a number of activities including:
• Construction of a lease pad around the bore;
• Construction of grids, gates and access tracks; and
• Subsequent rehabilitation of any land impacted in the course of carrying out the activities.
This definition indicates that more than just the bore itself is impacted by the tenement holder's activities.
Pursuant to clause 6(f) of the agreement, the make good measures, provide full and appropriate compensation for the following:
1) Likely impaired capacity to the bore resulting from Origin activities;
2) the permanent impairment to the bore as a result of decommissioning; and
decommissioning activities.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 6-10.
Income Tax Assessment Act 1997 Division 104.
Income Tax Assessment Act 1997 Section 110-40.
Income Tax Assessment Act 1997 Section 110-45.
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 permanent damage to an underlying asset being your agricultural land. It is clear that the reduction in the availability of water will significantly reduce the value of this land for its intended purpose.
Consequently the compensation payments will not be assessable income under section 6-5 of the ITAA 1997 as the payments relate to a capital asset.
In this instance as per the Commissioner's view in paragraph 6 of TR 95/35 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 110-40 or 110-45 of the ITAA 1997 as a recoupment of purchase price.