Edited version of private advice

Authorisation Number: 1051590487712

Date of advice: 4 October 2019

Ruling

Subject: Treatment of compensation receipts over an easement of a property

Question

Are the compensation amounts received treated as assessable income?

Answer

Yes

This ruling applies for the following period:

1 July 2017 to 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You purchased land a number of years ago.

In 20XX you were initially approached by A and their representative B in regards to having a powerline easement over your property.

At that time you were strongly against this easement as it would interrupt the scenic view of your principal residence, which at that time was being constructed.

A and B approached you several times as the viability of the project was discussed and debated. You refused to change your stance on the easement.

Subsequently, a final decision was made to proceed with the power line easement.

You were advised on several occasions that you had to surrender your land or that the land would be taken by compulsory acquisition.

You then began to negotiate with A, after being told that should you not surrender the land, you would have to go to the high court and would be liable for substantial legal costs, for both yourself and for A.

You did not want to surrender the land; however A advised that you should do so or they would take the land by compulsory acquisition and you would receive minimal compensation and incur large legal fees.

You later entered into an agreement with A granting the right to the use of the land. You would receive $X as compensation and $X for the disturbance during the construction phase of the powerline easement.

The property was used for private and domestic purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-35

Reasons for decision

Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides some amounts that are not 'ordinary income' are included in a taxpayer's assessable income due to another provision of the tax law. These amounts are 'statutory income'. Statutory income may arise from CGT events as consequence of an eligible claimant being entitled to receive compensation and the loss and destruction of a CGT asset.

Easement

An easement is a right over someone else's land or property. It is an asset which is created at the time it is granted.

The taxation treatment of a payment for the granting of an easement depends on whether the easement has been created by compulsory acquisition or as a voluntary action.

Taxation Ruling TR 97/3 at paragraph 4 states:

Compensation in respect of an easement created by statute in favour of a public authority cannot be said to have been received for the grant of the easement. The Land Acquisition (Just Terms Compensation) Act 1991 (NSW) and similar Acts in other jurisdictions enable public authorities to take land or an interest in land (including an easement) for specified purposes and confer on the affected landowner a right to compensation. In these circumstances, the landowner cannot be said to have created an asset as required for subsection 160M(6) of the Act to apply. The easement is created by operation of the relevant statute and is vested in the public authority. This constitutes a compulsory acquisition of the easement.

Note: subsection 160M(6) of the Income Tax Assessment Act 1936 referred to in the above paragraph has been replaced with section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997). The effect of both provisions is the same.

Taxation Ruling TR 95/35 examines the treatment of any amount received in respect of a right to seek compensation in relation to an underlying asset. Where easements are acquired under statute, the underlying asset is the landowner's pre-existing land with its rights of ownership, including the right to exclude all others. This right to exclude all others is forfeited when the easement comes into existence.

Compensation received by a landowner for the loss of part of the rights of ownership is accepted as being consideration received in respect of the part disposal of the underlying asset (the land) (paragraph 8 of TR 97/3).

It is possible that a public authority that has the power to compulsorily acquire an easement by exercising a statutory power may enter into an agreement with the landowner to acquire the easement.

The Commissioner's view, in these situations, is the amount received takes on the same character as compensation for a compulsorily acquired easement. Thus, the consideration (compensation) for granting the easement is treated as being paid in respect of the part disposal of the land and not in respect of the grant of the easement (paragraphs 9 and 10 of TR 97/3).

It is accepted that Newcrest has the legislative power to compulsorily acquire the easement. Thus, the payment you received from Newcrest is considered to be capital proceeds for the part disposal of the Land. Any gain you made from the granting of the Easements is assessable as a capital gain.

Based on the above the compensation payment of $X is capital in nature.Any gain you made from the granting of the easements is assessable as a capital gain.

Disturbance payment

Paragraph 3 of TR 95/35 defines "Right to seek compensation" as:

The right to seek compensation is the right of action arising at law or in equity and vesting in the taxpayer on the occurrence of any breach of contract, personal injury or other compensable damage or injury. A right to seek compensation is an asset for the purposes of Part IIIA. The right to seek compensation is acquired at the time of the compensable wrong or injury, and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged.

In your instance you were paid $X as a construction access allowance. You stated it was paid for the disturbance caused during the construction phase of the powerline easement.

For the disposal of the right to receive compensation, the relevant CGT event is CGT event C2 under section 104-25 of the ITAA 1997. It happens where a taxpayer's ownership of an intangible CGT asset ends by the asset:

(a)   being redeemed or cancelled; or

(b)   being released, discharged or satisfied; or

(c)   expiring; or

(d)   being abandoned, surrendered or forfeited; or

(e)   if the asset is an option being exercised; or

(f)     if the asset is a convertible interest being converted.

Based on the above, the payment the construction access allowance is also capital in nature. Any gain from the surrender of your right to seek compensation is assessable as a capital gain.