Private ruling: Compensation payment - interest - cost base
Published: October 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the compensation payment you received a capital payment under Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is the amount received a reduction to the cost base of the asset under Subdivision 112-A of the ITAA 1997? | A2: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 Subsection 6-5(1) | Income Tax Assessment Act 1997 Subdivision 112-A | Petroleum and Gas (Production and Safety) Act 2004 (Qld)

Reasons for decision: Summary: Your assessable income includes income according to ordinary concepts. For income tax purposes, a compensation amount generally bears the character of that which it intends to replace. A compensation receipt will be of an income nature where it replaces a revenue item and capital in nature where it replaces capital items. In your case, you received an undissected lump sum payment. Under the Petroleum and Gas (Production and Safety) Act 2004, company A are liable to pay compensation to you for any 'compensatable effect' The agreement between company A and you defines compensation liability as 'the liability to compensate the landholder for any compensatable effects caused by the tenement holder, for example the impact on the value of the land, directly and indirectly impacted by the activities set out in section 1 of schedule 1 of the Conduct and Compensation Access Agreement. Compensatable effects is defined in Petroleum and Gas (Production and Safety) Act 200, In your case, the compensation is a capital payment and as such the whole compensation payment is considered capital in nature. If you receive a compensation receipts relating to permanent damage to, or permanent reduction in the value of the underlying that receipt should be applied to reduce the total acquisition costs of the asset. If there is no disposal of the underlying asset at the time you receive compensation for permanent damage to, or permanent reduction in the value of a post-CGT asset, then the compensation is a recoupment of part or all of the acquisition costs of the underlying asset. In general terms, if the underlying asset has been permanently damaged or reduced in value, the compensation operates to reduce its cost base. You have received a lump sum undissected compensation amount that is capital in nature. This payment relates to the damage or reduction in value of your land from the development of a number of wells and associated infrastructure by company A. We consider that the compensation is a recoupment of part or all of the total acquisition costs of the land.

Relevant facts: You own a parcel of land which is not used to produce assessable income. | You have provided a document which forms part of this private binding ruling. | · Copy of the standard conduct and compensation agreement. | The following information has been obtained from this document: | You have entered into a Conduct and Compensation Access Agreement with company A, B and C (collectively the tenement holder "A") after 20 September 1985. | Company A proposes to drill a number wells and install associated infrastructure. | Company A is to pay you compensation. | Compensation is being paid for: | · deprivation of possession of the land surface | · diminution of the land's value | · diminution of the use made, or that may be made, of the land or access land or any improvement on it | · severance of any part of the land or access land from other parts of the land or access land, or from other land that the landholder owns | · any costs or loss arising from the carrying out of the activities on the land or access land | · any consequential damages the landholder incurs because of a compensatable effect referred to above. | The agreement provides lump sum compensation as well as an amount that is payable per annum and is subject to consumer price index increases.