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Edited version of private advice
Authorisation Number: 1052317774713
Date of advice: 15 October 2024
Ruling
Subject: CGT - compensation
Question
Will compensation received due to the imposition of a Public Acquisition Overlay and denial of a subdivision application reduce the cost base of the land in accordance with subsection 110-40(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes. The underlying asset that the compensation relates to is the Land, and it has been received because of the damage caused by the imposition of Public Acquisition Overlay and denial of a subdivision application. The compensation is not the assessable income of the Entity. It is a recoupment of all or part of the acquisition costs of the Land, therefore reducing its cost base or reduced cost base in calculating any capital gain or capital loss in accordance with subsection 110-40(3) of the ITAA 1997.
This ruling applies for the following period:
Year ended 30 June 20XY
The scheme commenced on:
DDMM20XY
Relevant facts and circumstances
The relevant asset is the Land owned by the Entity.
On DDMM20XV a Public Acquisition Overlay (PAO) was issued which affects the Land as well as nearby properties.
The purpose of a Public Acquisition Overlay is to reserve land for a public purpose and to ensure that changes to the use of the land do not prejudice the purpose for which the land is to be acquired.
On DDMM20XW the Entity applied to the relevant Council for a permit to subdivide the Land.
On DDMM20XW the Council issued a Notice of Decision to Refuse to Grant a Permit (Notice of Refusal) on the grounds that the subdivision was incompatible with the PAO.
On DDMM20XX the Entity sought compensation from the relevant government entity under the relevant legislation for financial loss incurred because of the Notice of Refusal and the imposition of the PAO.
After negotiation on DDMM20XY, the Entity accepted a total compensation offer comprising:
a. $X,XXX,XXX for financial loss, and
b. $XX,XXX for professional expenses.
The entitlement to compensation arose out of the imposition of the PAO and subsequent Notice of Refusal.
The Land has not been compulsorily acquired.
The Entity does not have a history of property development for resale. It holds commercial properties with long term leases. It is an Australian resident for tax purposes.
There is no expiry date for public acquisition overlays.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 6-10
Income Tax Assessment Act 1997 subsection 110-40(3)