Private ruling: CGT - mining compensation
Date of advice: 1 July 2015
Published: July 2015
Ruling period: Income year ended 30 June 2015 | Income year ended 30 June 2016 | Income year ended 30 June 2017 | Income year ended 30 June 2018 | Income year ended 30 June 2019 | Income year ended 30 June 2020 | Income year ended 30 June 2021 | Income year ended 30 June 2022 | Income year ended 30 June 2023 | Income year ended 30 June 2024 | Income year ended 30 June 2025
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the compensation payments (annual and lump sum) be assessable as ordinary income as defined by section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will compensation payments represent capital proceeds of any CGT event in Division 104 of the ITAA 1997? | A2: No | Q3: Will the compensation payment reduce the cost base of the relevant property for any future capital gain under section 110-40 or section 110-45 of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: You are the landowner of property, which you use to carry on a business. You have entered into a Conduct and Compensation Agreement (CCA) under the Petroleum and Gas (Production and Safety) Act 2004 (PAGA) with a mining company to compensate you for Coal Seam Gas related activities carried on your property including the construction of gas wells, infrastructure and access tracks. The Agreement details the agreed authorised activities relevant to the damages caused. Clause 8 and 9 of the Agreement along with section 532 of the Petroleum and Gas (Production and Safety) Act 2004 (PAGA) provides that you have been compensated for the following heads of damage: • deprivation of possession of its surface; • diminution of its value; • severance of any part of the land from other parts of the land; • any cost, damage or loss arising from the carrying out of the activities under the petroleum authority on the land • legal, account and valuation costs incurred in negotiation the CCA.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 110-40 | Income Tax Assessment Act 1997 section 110-45 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 118-37

Reasons for decision: Summary: PAGA establishes a statutory scheme to provide compensation to landowners for the impacts of petroleum and gas production activities; and requires the relevant parties to enter into a CCA. The purpose of the scheme is to ensure that landowners are not financially disadvantaged by activities carried out on their property. Landowners are entitled to compensation for any compensatable effects related to the impact of the activities on their business operations and land use. Payments pursuant to a PAGA are generally treated as capital in nature where those amounts are compensation payments for compensatable effects. It is considered that characterising the payments as capital in nature is in keeping with the ATO view on the taxation treatment of compensation receipts contained in Taxation Ruling TR 95/35. For the purposes of TR 95/35 it is necessary to identify the underlying asset. TR 95/35 defines an underlying asset: The underlying asset is the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity. If there is more than one underlying asset, the relevant underlying asset is the asset which leads directly to the payment of the amount of compensation. For example, if a taxpayer receives an amount of compensation for the destruction of his or her truck, the truck is the underlying asset. The decisions in Nullaga Pastoral Company Pty Ltd v FC of T 78 ATC 4329; (1978) 8 ATR 757 and Barrett v Federal Commissioner of Taxation [1968] HCA 59; (1968) 118 CLR 666; 15 ATD 149; 10 AITR 685 are relevant to identifying the underlying asset in the current context. In both of those cases the landholders were conducting ongoing successful farming operations. The payments were held to be compensation for damage to property which formed part of the profit-yielding structure of the landholders. Paragraph 6 of TR 95/35 provides that it is the Commissioner's view that where an amount of compensation is received wholly in respect to permanent damage suffered to a CGT asset of the taxpayer and there is no disposal of the asset, the compensation represents a recoupment of purchase price. The total acquisition costs for the relevant asset should be reduced by the amount of compensation received under section 110-40 or 110-45 of the ITAA 1997. We consider that you have been compensated under s532 of PAGA primarily for permanent damage to an underlying asset being your property. As the property is not being disposed of, the compensation will reduce the cost base of the property for any future capital gain.