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Edited version of private advice
Authorisation Number: 1051613925871
Date of advice: 26 November 2019
Ruling
Subject: The treatment of excess mining compensation payments.
Question
Will compensation received for permanent damage to an asset land reduce the asset's cost base?
Answer
Yes
This ruling applies for the following periods:
Years ending 30 June 2020 to 30 June 2022
The scheme commences on:
1 July 2019
Relevant facts and circumstances
You own the asset.
The asset was partially acquired prior to 20 September 1985 and partially after 20 September 1985.
The asset is used in your business.
You will receive compensation for permanent damages to the asset.
Relevant legislative provisions
Income Tax Assessment Act 1936 Paragraph 160ZH(1)(a)
Income Tax Assessment Act 1936 Subsection 160ZH(11)
Question
Taxation Ruling 95/35 Income Tax: capital gains: treatment of compensation receipts (TR 95/35) states at the following paragraphs that:
6. If an amount of compensation is received by a taxpayer wholly in respect of permanent damage suffered to a post-CGT underlying asset of the taxpayer or for a permanent reduction in the value of a post-CGT underlying asset of the taxpayer, and there is no disposal of that underlying asset at the time of the receipt, we consider that the amount represents a recoupment of all or part of the total acquisition costs of the asset.
133. Accordingly, if the amount of recoupment exceeds the taxpayer's total acquisition costs at the time of the compensation, the effect of subsection 160ZH(11) is to reduce the costs to zero. The excess of the recoupment over the costs in these circumstances does not represent a taxable capital gain derived from the disposal of that asset. There are no CGT consequences in respect of any excess. It follows that the whole consideration received on a later actual disposal of that asset by the taxpayer will be a taxable capital gain (unless the taxpayer incurs additional expenditure which forms part of the cost base of that asset).
In your circumstances the payment received relates to permanent damage to an underlying asset (the land). The compensation is treated as a recoupment of all or part of the acquisition cost of the asset. The cost base of the asset is reduced to the extent of the consideration and any gain or loss will crystallise at the later time when the asset is sold.