Private ruling: Compensation payments
Date of advice: 6 September 2021
Published: November 2021
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will the receipt of the Access Fee be ordinary assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Is the Works Fee paid to the landowners compensation for permanent damage to, or a permanent reduction in the value of, the underlying land, thereby reducing the cost base of the Land by the amount equal to the Works Fee? | A2: Yes | Q3: Is the other specified fee paid to the landowners compensation for permanent damage to, or a permanent reduction in the value of, the underlying land, thereby reducing the cost base of the Land by the amount equal to this Fee? | A3: Yes | Q4: Will the receipt of the Easement Fee be capital proceeds in relation to a capital gains tax (CGT) event D1 occurring? | A4: Yes | Q5: Will the Agreement for Lease Reinstatement Licence Fee or the Lease Reinstatement Licence Fee constitute capital proceeds in relation to CGT event D1? | A5: Yes | Q6: Will the receipt of the rent by the landowners be ordinary assessable income under section 6-5 of the ITAA 1997? | A6: Yes This ruling applies for the following periods: Year ended 30 June 20xx to Year ending 30 June 20xx The scheme commenced on 1 July 20xx


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 10-5 | Income Tax Assessment Act 1997 Subdivision 20-A | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-35 | Income Tax Assessment Act 1997 Division 110 | Income Tax Assessment Act 1997 Subsection 116-20 Detailed reasoning | Ordinary income | Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. | Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. | Other characteristics of income that have evolved from case law include receipts that are earned, are expected, are relied upon, and have an element of periodicity, recurrence or regularity. | For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433). | On the other hand, if the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income. | In Scott v. FC of T (1966) 14 ATD 286, Windeyer J expressed the view that whether or not a particular receipt is income depends upon its quality in the hands of the recipient. | The access fee is payable annually for the relevant period. This periodic fee relates to the access and use of your property and it is considered that the access fee payments are akin to rent. Therefore, the access fee is ordinary assessable income under section 6-5 of the ITAA 1997. | Similarly, the rent payments received by you, the landowners, are also assessable under section 6-5 of the ITAA 1997. | Statutory income | Statutory income is not ordinary income, but is included in assessable income by specific provisions of the income tax law (section 6-10 of the ITAA 1997). | These specific provisions are listed in section 10-5 of the ITAA 1997 and include capital gains, which are included in assessable income by virtue of the capital gains tax (CGT) provisions. | These provisions also include Subdivision 20-A of the ITAA 1997 which deals with assessable recoupments. | Whether or not a particular receipt is ordinary income or statutory income depends on its character in the hands of the recipient. For income tax purposes, a compensation amount generally bears the character of that which it is paid to replace. | Compensation | Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts considers the CGT consequences for compensation payments. Why the payment was made is an important factor in determining whether an asset has been disposed of for capital gains tax purposes. | TR 95/35 discusses the various scenarios, including: | • disposal of the underlying asset, | • compensation for permanent damage to, or permanent reduction in value of, the underlying asset, and | • disposal of the right to seek compensation. | As outlined in the ruling, the Commissioner adopts an ''underlying asset'' approach to determine the asset to which the compensation amount is most directly related. In concluding that the underlying asset is the most relevant asset to which an amount of compensation relates, a person must be able to show that the compensation receipt has a direct and substantial link with the underlying asset. If an asset has not been disposed of and has not been permanently damaged or permanently reduced in value by the happening or event which generated the amount of compensation, the taxpayer is not able to demonstrate that link. It follows that the compensation cannot be directly related to that asset. In those cases, the most relevant asset may be the right to seek compensation, or the notional asset. | Paragraph 3 of TR 95/35 states that permanent damage or reduction in value does not mean everlasting damage or reduced value, but refers to damage or a reduction in value which will have permanent effect unless some action is taken by the taxpayer to put it right. | If an amount of compensation is received wholly in respect of permanent damage suffered to a post-CGT underlying asset or for a permanent reduction in the value of a post-CGT underlying asset, and there is no disposal of that underlying asset at the time of the receipt, we consider that the amount represents a recoupment of all or part of the total acquisition costs of the asset. This is so, regardless of whether the compensation is received as one lump-sum or a smaller lump-sum and a series of annual payments. | Accordingly, the total acquisition costs of the post-CGT asset should be reduced by the amount of the compensation received for the damage to the property. No capital gain or loss arises in respect of that asset until you actually dispose of the underlying asset. If the compensation amount exceeds the total unindexed acquisition costs (including a deemed cost base) of the underlying asset, there are no CGT consequences in respect of the excess compensation amount. | The compensation payments are not earned by you as they do not relate to services performed or from carrying on a business. Although the payment can be said to be expected, and perhaps relied upon, this expectation does not arise from any personal services performed or business activity. Furthermore, although the compensation relates to your property, the payment is not akin to rent. The compensation payment relates to the damage to part of your property and is capital in nature. Accordingly, it is not regarded as ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997. | The underlying asset in your case is the land that has been used for the specified activities. You have not disposed of the land, however it is accepted that the land will suffer permanent damage. You will receive compensation in respect of the impact of the activities on the land. The compensation amounts, paid as works fee and other specified fees, are viewed as having a direct and substantial link or nexus with the land. | In this case you have received, and will continue to receive, compensation payments as a result of activities being carried out on your property. These activities have resulted in the permanent damage to, or permanent reduction in the value of, the property. | As you have not disposed of the property, there are no CGT consequences at the time of entering into the agreement or receiving the compensation payments. | However, the property's acquisition cost will be reduced by the compensation payments (excluding reimbursements) received in relation to that property. That is, the cost base of the property will be reduced by the value of the works fee and wind monitoring mast fee payments and any gain or loss will crystallise at a later time when the property is sold. | Easement | An easement is a right over someone else's land or property. The taxation treatment of a payment for the granting of an easement depends on whether the easement has been created by compulsory acquisition or as a voluntary action. | Taxation Ruling IT 2561 Income tax: capital gains: grants of easements, profits a prendre and licences explains that an easement (or other comparable right) is an asset created at the time it is granted. | Taxation Determination TD 2018/15 Income tax: capital gains: does CGT event D1 happen if a taxpayer grants an easement, profit à prendre or licence over an asset? | explains that CGT event D1 rather than CGT event A1 happens if a taxpayer grants an easement, profit à prendre or licence over an asset. | CGT event D1 (section 104-35 of the ITAA 1997) happens if you create a contractual right or other legal or equitable right in another entity. The time of the CGT event D1 is when you enter into the contract or create the other right. A capital gain from a CGT event D1 is not a discount capital gain, as the easement is created at the time of the agreement. | If the grant of the easement occurs on or after 20 September 1985, the CGT provisions apply on the disposal of the new asset. This applies even though the land the easement is granted over may have been acquired before 20 September 1985. | Under the Agreement for Lease, you will receive an easement fee. The easement was not created by a compulsory acquisition, rather as a voluntary action. The easement is a separate CGT asset. Because the easement granted to entity D was created after 20 September 1985, it is a post CGT asset. | In your circumstances, the easement fee is regarded as capital proceeds as a result of a CGT event D1. | Licence fee | As confirmed in TD 2018/15, CGT event D1 occurs if you grant a licence to another entity. | The reinstatement licence the landowners will grant to the tenant will provide the tenant with the right to access the land for the purpose of removing infrastructure and restoring the land. It does not provide the tenant with the right of exclusive access or occupation of the land. | The fee payable by the tenant when the reinstatement licence is granted, whether under the Agreement for Lease or Lease, is expected to be a one off fee for the grant of the 12 month licence, with the option to extend if necessary, for the tenant to complete the removal and restoration activities. | The reinstatement licence is regarded as a contractual right in relation to your land. At the time when the landowners grant the reinstatement licence to the tenant, CGT event D1 will occur. The reinstatement licence fee will be regarded as capital proceeds received by the landowners for this CGT event D1.


Relevant facts: The landowners (Entity A, Entity B and Entity C) own land (the land)), used for business activities. | Entity A acquired interest in the land prior to 20 September 1985, | Entity B acquired interest in the land prior to 20 September 1985. | Entity C acquired interest in the land after 20 September 1985. | On xxxx, the landowners entered into an Agreement for Lease (AFL) with Entity D. | A copy of the AFL and other relevant documents have been provided. | The specified activities are due to start in xxxx. | The land will be impacted by the activities. | Pursuant to the Agreement for Lease, Entity D is required to pay the landowners the following: | • AFL reinstatement licence fee.