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Edited version of your written advice
Authorisation Number: 1051309525618
Date of advice: 20 December 2017
Ruling
Subject: Treatment of compensation payments
Question
Will the compensation payments in relation to the land the Trust leases form part of the Trust’s assessable income?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 201B
Year ended 30 June 201C
Year ended 30 June 201D
Year ended 30 June 201E
Year ended 30 June 201F
Year ended 30 June 201G
Year ended 30 June 202H
Year ended 30 June 202I
Year ended 30 June 202J
Year ended 30 June 202K
The scheme commences on:
1 July 201A
Relevant facts and circumstances
The Trust leases land at the following locations:
● Lot A
● Lot B
● Lot C
● Lot D
The Trust carries on a primary production business
Primary production activities are being undertaken on the land. It is expected that the carrying capacity of the land will reduce due to the reduction in the actual amount of land available as a result of the placement of the primary production infrastructure on the land and the impact on the productivity of all land due to the presence of all activities on the land.
On XX/XX/XXXX the Trust and the land owners entered into a conduct and compensation agreement (CCA) under the Relevant Act 2004 with Entity A for the land leased at Lots A, B, C and D.
The compensation amounts set out in Schedule 1 to the CCA are:
● Lot A and Lot B - $X per annum during the period from the date of the previous deferral agreement to the end of the term. The definitions to the CCA provide that the term of the agreement will cease upon the completion of the activities on the land. The activities have been included with this ruling.
● Lot D - $X per annum during the period from the date of the previous deferral agreement to the end of the term.
● Lot C - $X per annum during the period from the date of the previous deferral agreement to the end of the term.
The CCA was entered into by the Trust to compensate the Trust in relation to the primary production activities on the land that the Trust leases.
Both the owners and occupier are described as the landholders in the CCA and in clause 13 of the CCA the parties acknowledge that Entity A is not required to, and will not, inquire into or ensure that the compensation has been distributed fairly, equitably or otherwise in accordance with any agreement or understanding between each of the landholders.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5,
Income Tax Assessment Act 1997 Subsection 6-5(2) and
Income Tax Assessment Act 1997 Section 6-10,
Reasons for decision
Summary
The compensation payments you will receive under the conduct and compensation agreement form part of the Trust’s assessable income. They are considered to be compensation received for the loss of income amounts relating to the business which is carried on by the Trust.
Detailed reasoning
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
An amount paid to compensate for loss generally acquires the same nature of what it is substituting (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).
It is accepted that the compensation amounts received by the land owners under the CCA are for the permanent reduction in value and permanent damage to the land that they own.
However, as stated by the applicant in the private ruling application, any permanent diminution in the productive capacity of the land does not affect the value of any asset owned by the occupier/tenant. That is, any compensation received by the Trust as the occupier/tenant is not for any permanent reduction in value or permanent damage to an asset of the Trust. It is considered that any compensation received by the Trust under the CCA is for loss of income in relation to the business carried on by the Trust on the land.
These payments are assessable as income under section 6-5 of the ITAA 1997, as they are paid to take the place of lost earnings.