Edited version of private advice

Authorisation Number: 1051902721843

Date of advice: 15 November 2021

Ruling

Subject: CGT - compensation payment - personally wrong or injury

Question

Is the capital gain you made as a result of the Deed of Release, disregarded under section 118-37 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July XX

Relevant facts and circumstances

You are the registered owner and sole occupant of a cattle property (the Property).

Company X operates a mine directly joining the southern boundary of the Property. Your home is located near this boundary. Over the years the mining activity including the dumping of overburden has moved closer to your shared boundary. This has brought the mining activity in close proximity to your home.

You have stated that the dust, noise, odour, vibration, blasting and light from the continuous (24 hours per day, 365 days per year) operation has caused you significant disruption, including:

a.               fatigue, stress, and general health issues

b.               sleep disruption due to the level of noise and night pollution at night

c.               impacts on your respiratory system due to the high levels of dust, and

d.               impact on your hearing from the operating of heavy machinery and blasting.

You have been in dispute with Company X about these issues and have now reached an agreement to settle this dispute through a Deed of Release.

The Deed of Release:

•                 recognises that you are the registered owner and sole occupant of the Property that adjoins the mining land

•                 acknowledges that you have complained of dust, noise and light nuisance from operations of the mine

•                 provides that, without admission of liability Company X has agreed to pay you a settlement sum of $XXX in settlement of all present and future claims connected with its mining activities on the terms set out in the deed.

•                 requires you to acknowledge that:

                                     i.                    the settlement sum fully compensates you for nuisance suffered in connection with your land or your usage of enjoyment of it.

                                   ii.                    there is not an admission of liability from Company X.

                                  iii.                    there is no need for nuisance abatement or monitoring.

                                  iv.                    none of the nuisance arising from mining activities creates a substantial or unreasonable interference with your use and enjoyment of the land, other than the dust, noise, light emissions affecting the current residence.

                                   v.                    nuisance from the mining activities does no cause interference with farming or other actives undertaken on the land

                                  vi.                    any future uses of the land will be at your risk as to whether or not any nuisance from the mining activities interferes with those uses.

•                 requires you to consent to present and future nuisance arising from mining activities, regardless of whether the nuisance affects building or structures constructed prior to or after the date of the deed.

•                 states that you will not make or support any complaints, objections or claims in relation to nuisance caused by mining activities.

•                 states that you will release and discharge Company X (affiliates and personnel), from any and all claims whether present, unascertained, future or contingent arising from, or in connection with:

                                     i.                    any nuisance from mining activities

                                   ii.                    flood damage to any building used for residential purposes and any other property within or infrastructure related to it.

•                 will not prevent you from bringing a claim against Company X for physical damage to fencing cattle, or infrastructure not used for residential purposes or any flood damage does not cover physical damage to fencing, cattle or infrastructure on the land (apart from infrastructure used for residential purposes)

•                 states that you propose to relocate all residences on the land away from the mine area, to an area of land which is free of any nuisances from the mining activities, with the costs to be paid by you

•                 states that you must not allow commercial building or structures to be constructed for use by a third party without first providing Company X a binding deed of accession

•                 states that you may transfer, assign or sell land with 20 business days' notice and first providing Company X with Deed of Accession entered into by person whom land the land is transferred to.

The Deed of Settlement does not provide a breakdown of the settlement amount.

You were able to reach the settlement with Company X without the need for legal action.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 108-5(1)(b)

Income Tax Assessment Act 1997 section 118-37

Reasons for decision

Summary

A CGT event C2 event occurred when you signed the Deed of Release surrendering your right to compensation from any claim related to the nuisance from Company X's mining activities. The whole undissected lump sum amount of $XXX is treated as being consideration received for the disposal of the right to seek compensation. As your claim against Company X was for personal injury or wrong, under paragraph 118-37(1)(a) of the ITAA 1997 the capital gain arising from CGT event C2 can be disregarded.

Detailed reasoning

The right to seek compensation falls within the definition of a CGT asset, being a legal or equitable right that is not property (paragraph 108-5(1)(b) of the ITAA 1997). 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.

CGT event C2 happens when the ownership of an intangible CGT asset ends by the asset being satisfied or surrendered. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged.

In your case, CGT event C2 occurred when you signed the Deed of Release, surrendering your rights to compensation related to the nuisance from Company X's mining activities.

Treatment of compensation receipts

Taxation ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts (TR 95/35), sets out the Commissioner's views on the capital gains tax (CGT) implications of compensation payments. The ruling states that it is necessary to identify the underlying asset to which the payment relates and what has occurred to that asset. A so called 'look-through' approach.

If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying post-CGT asset, or part of an underlying post-CGT asset, the taxpayer's compensation represents consideration received on the disposal of that asset (paragraph 4 of TR 95/35).

If an amount of compensation is received by a taxpayer wholly in respect to a post-CGT underlying asset being damaged or suffering a permanent reduction in the value, the compensation amount is considered to represent a recoupment of all or part of the total acquisition costs of the asset (paragraph 6 of TR 95/35).

However, if the amount of compensation is not received in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation (paragraph 11 of TR 95/35).

If the compensation relates directly to more than one asset, it is necessary to determine the most relevant assets and to apportion the compensation between those assets. However, where compensation received is an undissected lump sum, the whole amount is treated as being consideration received for the right to seek compensation (paragraph 15 and 18 of TR 95/35).

Exemption for personal wrong or injury

Paragraph 118-37(1)(b) of the ITAA 1997 disregards capital gains from a CGT event relating directly to compensation receipts where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness. Subparagraph 118-37(1)(a)(ii) of the ITAA 1997 applies to disregard any capital gain or loss arising from the payment in respect to personal injury.

Wrong, injury or illness are not defined in tax legislation and take on their ordinary meaning. Paragraph 213 of TR 95/35 states that the exemption is to be read widely in considering the type of compensation receipts that call withing its scope.

Paragraph 21 of TR 95/35 limits the exemption where compensation is received by a taxpayer in a lump sum paid in settlement of a number of claims, including a personal injury claim.

In your case, the Commissioner accepts that the $XXX payment under the Deed of Release was a settlement directly related to the personal wrong and injury claim against Company X. This being the only claim that you made against Company X. Consequently, the capital gain you make from the CGT event C2 for giving up your right to seek compensation can therefore be disregarded under paragraph 118-37(1)(a) of the ITAA 1997.