Edited version of your written advice

Authorisation Number: 1012872607931

Date of advice: 7 September 2015

Ruling

Subject: Mining compensation

Question 1

Will the compensation payments 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 payments represent capital proceeds of any CGT event in Division 104 of the ITAA 1997?

Answer

No.

Question 3

Will the compensation payments 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

Will the compensation payment be disregarded as a personal wrong under section 118-37 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on:

15 January 2015

Relevant facts and circumstances

You are the landowner of rural lifestyle block.

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

The CCA states that the compensation compensates for all of the impacts of the Activities, including the loss of use of part of the Land, all impacts of noise, light, dust, odour, vibration, vehicular movements and loss of amenity generally.

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 118-37.

Reasons for decision

Summary

The compensation will reduce the cost base of the property for any future capital gain. The compensation will not be disregarded under paragraph 118-37(1)(b) of the ITAA 1997.

Detailed reasoning

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.

We consider that you have been compensated 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.

In some cases, an amount of compensation can be received in respect of private nuisance from dust, noise and personal inconvenience caused by the activity of the Mining Company on your land. In those cases, the CCA specifically states that the compensation is directly related to the personal nuisance and inconvenience.

However, in your case, the CCA states that the compensation payment is for:

"…all of the impacts of the Activities, including the loss of use of part of the Land, all impacts of noise, light, dust, odour, vibration, vehicular movements and loss of amenity generally."

The CCA does not state that particular payments relate to a specific injury or illness which you have suffered personally. Therefore, the compensation will not be disregarded under paragraph 118-37(1)(b) of the ITAA 1997.