Private ruling: capital gains tax implications on the receipt of compensation in relation to an easement
Published: October 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the proceeds received in compensation for the acquisition of an easement over your land assessable under the capital gains tax (CGT) provisions of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1:  | Q2: Will the compensation received be considered to be in respect of the part disposal of the underlying asset (the land)? | A2:  | Q3: Will the compensation received be treated the same whether the easement is acquired compulsorily, or under voluntary agreement, where the acquiring body has the authority to compulsorily acquire the land if necessary? | A3: 

Relevant facts and circumstances: The deceased acquired the property in the 1950's. The deceased operated a business on the land for the entire term of their ownership. The property was also their principal residence. The deceased died and the property passed to the estate. The estate was issued with an ABN and is also registered for GST. A business is still being operated on the property whilst the estate is being finalised. An entity wishes to acquire an easement over the property to construct new powerlines. You state that you may come to a voluntary agreement with the entity to acquire the easement. A letter from the entity states that legislation provides authority for the entity to acquire land where agreement cannot be reached. Acquisition of an easement may take place through a compulsory acquisition process in accordance with the Land Acquisition (Just Terms Compensation) Act 1991 .

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10

Reasons for decision: Detailed Reasoning - Detailed reasoning: Taxation Rulings TR 95/35 and TR 97/3 discuss the capital gains treatment of compensation receipts. Taxation ruling TR 97/3 extends the application of TR 95/35 and should be read in conjunction with that ruling. TR 97/3 specifically deals with compensation received by landowners from public authorities. This ruling, therefore, will have direct application in this case. Paragraph 4 of TR 97/3 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…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. Paragraphs 6 through 10 of TR 97/3 state: …In the case of easements acquired under statute and the consequential disposal of the right to compensation, the most relevant asset is the landowner's pre-existing land with its rights of ownership including, for example, a right to exclude all others. This right to exclude all others is forfeited in part when the easement comes into existence. The loss of part of this right constitutes the disposal of part of the underlying asset (the land). The acquisition of an easement by a public authority using the compulsory process provided in the relevant statute culminates in a declaration by notice in the Gazette that the easement has been acquired. However, it is possible that a public authority may acquire an easement by agreement with the landowner. Because the grantee of the easement (the public authority) has available, if it chooses to exercise it, the power to compulsorily acquire the easement, the amount received, in our view, takes on the same character as compensation for a compulsorily acquired easement. It is therefore appropriate that Part IIIA apply in the same way, that is, the consideration (compensation) is paid in respect of the part disposal of the land and not in respect of the grant of the easement. Section 104-10 of the Income tax Assessment Act 1997 (ITAA 1997) provides that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. The time of the event is: when you enter into the contract for the disposal; or if there is no contract - when the change of ownership occurs. Section 112-30 of the ITAA 1997 provides apportionment rules which can be used to calculate the cost base of an asset when a CGT event happens to some part of the asset. Subsection 112-30(3) of the ITAA 1997 provides the following formula: Cost base of the asset × Capital proceeds for the CGT event happening to the part Those capital proceeds plus the market value of the remainder of the asset | Detailed Reasoning - Application to your circumstances: You expect to receive a compensation payment from an entity for the acquisition of an easement on your land. You intend to come to a voluntary agreement with the entity in relation to the easement. However, if you do not come to a voluntary agreement, the entity has the authority to compulsorily acquire the easement under legislation. Therefore, whether you come to a voluntary agreement with the entity, or the land is compulsorily acquired, the compensation payment is considered to be in respect of the loss of part of your rights of ownership which constitutes the disposal of part of the underlying land (a capital asset). As such, CGT event A1 will occur. As there has been a part disposal of the land, you should calculate the cost base of the asset in accordance with the apportionment rules as detailed above. If the capital proceeds received in compensation exceed the cost base of the asset in question, you will make a capital gain and it will be assessable under the capital gains tax provisions of the ITAA 1997.