Published: March 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the one-off payment and the annual payments made under Agreement be assessable as ordinary income or a capital gain? | A1: No | Q2: Will the total of the one-off payment and the annual payments made under the Agreement reduce the cost base of the relevant property? | A2: Yes

Relevant facts and circumstances: You are considering entering into an agreement with X. Under the agreement X will conduct ongoing investigation and monitoring on the property. The Agreement provides that X will pay you compensation that will compensate for all of the impacts of the activities covered by the Agreement, including the loss of use of part of the land, impacts from noise, light, dust, odour, vibration, vehicular movements and the loss of amenity generally. The compensation will be paid as a one-off lump sum payment in addition to annual payments.

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 110-55(6)

Reasons for decision: Summary: Taxation Ruling TR 95/35 provides the Commissioner's view on the taxation implications of compensation receipts. To determine the tax treatment of a compensation payment a "look through" approach is adopted to identify the relevant asset to which the compensation relates. Having regard to your full circumstances, it is accepted that the compensation payments will relate to the loss of use and amenity of an underlying asset, being the property. Consequently the compensation payments will not be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as the payments will be of a capital nature. We consider that the one-off payment and the annual payments under the Agreement will relate wholly to the permanent reduction in value of the property. In this instance, as there is no disposal of the underlying asset, the total payments will amount to a reduction of the cost base of the relevant property under section 110-55(6) of the ITAA 1997 as a recoupment of the purchase costs.