Private ruling: CGT - easement compensation
Date of advice: 22 July 2015
Published: July 2015
Ruling period: Income year ended 30 June 2011 | Income year ended 30 June 2012 | Income year ended 30 June 2013 | Income year ended 30 June 2014 | Income year ended 30 June 2015 | Income year ended 30 June 2016
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the one time only ad-hoc payment (ad-hoc payment) and the advance payment of compensation (advance payment) form part of the capital proceeds under section 116-20 of the Income Tax Assessment Act 199 7 (ITAA 1997) for the capital gains tax (CGT) event A1 that occurred when you granted the easement in the 2010-11 financial year? | A1: Yes | Q2: Will the Commissioner allow further time for you to choose to apply the small business rollover concessions to capital proceeds that relate to a CGT event that occurred in the 2010-11 financial year but were not received until the 2012-13 and 2013-14 financial years? | A2: Yes, an extension will be granted to XX August 20XX. | Q3: Will the Commissioner exercise his discretion under subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the replacement asset period to XX August 20XX? | A3: Yes, an extension will be granted to XX August 20XX.

Relevant facts and circumstances: You own a rural property which is used in a business you carry on. In July 20XX you signed a deed of option with the company in relation to creating an easement on your property. In April 20XX you signed the easement agreement and the option was exercised. You received an advance payment of compensation of $X,XXX in the 20XX-XX financial year You received full and final compensation payment in the form of a 'one time only ad-hoc payment' of $XXX,XXX in December 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 103-25 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-190(2) | Income Tax Assessment Act 1997 section 152-315

Reasons for decision: Detailed Reasoning - Compensation Payments: Taxation Ruling TR 95/35 provides the ATO view in relation to the treatment of compensation receipts. Paragraph [6] states that: If an amount of compensation is received by a taxpayer wholly in respect of permanent damage suffered to a post-CGT underlying asset of the taxpayer or for a permanent reduction in the value of a post-CGT underlying asset of the taxpayer, 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. For the purposes of TR 95/35 it is necessary to identify the underlying asset. TR 95/35 defines an underlying asset at paragraph [3]: 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. It is considered that 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 in this relation to identifying the underlying asset in respect of compensation paid by mining and gas companies. 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 [4] of TR 95/35 provides that if an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. | Detailed Reasoning - Granting of an easement: Taxation Ruling 97/3 provides the Commissioner's view on the compensation received from a public authority for the compulsory acquisition of an easement. While the company is not a public authority, the QLD state government has granted the pipeline project 'significant statues' through the publication of the Gazette Notice No. 13. The effect of the above is that it gives QGC the power to call on the state to grant it compulsory acquisition powers under section 125 of the State Development and Public Works Organisation Act 1971 . Taxation Ruling TR 97/3 provides: 9. The acquisition of an easement by a public authority using the compulsory process provided in the relevant statute culminates in 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. One of the features which the various statutes have in common is encouragement of acquisition by agreement. 10. Because the easement is created in these circumstances by grant by the landowner there is scope for an argument that subsection 160M (6) applies. However, 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, take 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 conisation (compensation) is paid in respect of the part disposal of the land and not in respect of the grant of the easement. | Detailed Reasoning - Application to your circumstances: It is considered in your circumstances that both the ad-hoc payment and the advance payment are received in respect of the granting of the easement. This is made clear by clause 9.6 of the deed which provides that if the compensation amount is in excess of the easement purchase price then the easement purchase price will be increased to the compensation amount. Even if the compensation amount was calculated under a different method such as a reduction in the head of cattle we would still consider the payment to be in respect of the granting of the easement. As per the Commissioner's view in TR 97/3 the granting of an easement is a part disposal of the land and consequently a CGT event A1. Consequently both the ad-hoc payment and the advance payment will form part of the capital proceeds of CGT event A1 that occurred when you granted the easement as per the Commissioner's view in TR 95/35. As the company had compulsory acquisition powers no new asset is created with the granting of the easement. Rather there has been a part disposal of the land being the rights associated with your ownership of the land. Consequently for the purpose of calculating the CGT 50% discount or the small business concessions active asset test the relevant asset is the land. | Detailed Reasoning - Question 2: You may choose to disregard all or part of a capital gain under the small business rollover exemption if you satisfy certain conditions. The general rule is that a choice available under the CGT provisions once made cannot be changed. Generally, such a choice must be made by the time the income tax return is lodged, or within such further time as the Commissioner allows (subsection 103-25(1) of the ITAA 1997). Under subsection 103-25(2) of the ITAA 1997, the way you prepare your income tax return is sufficient evidence of the making of the choice. Paragraph 103-25(3)(b) of the ITAA 1997, however, contains an exception in relation to the small business retirement exemption, as subsection 152-315(4) of the ITAA 1997 requires the choice for this exemption to be made in writing. In determining if the Commissioner should use his discretion to allow an extension of time the following will be considered: • there should be evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension; • account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension; • account must be had of any unsettling of people, other than the Commissioner, or of established practices; • there must be a consideration of fairness to people in like positions and the wider public interest; • whether there is any mischief involved; and • a consideration of the consequences. | Detailed Reasoning - Application to your circumstances: Taking into account the following: • there was sufficient uncertainty as to whether the payments would represent consideration for the earlier CGT event or some standalone event in the later income years • there would be no prejudice to the Commissioner or unsettling of people by allowing the extension • there is no mischief involved. The Commissioner considers it fair and equitable in these circumstances to exercise his discretion. An extension of time until XX August 20XX is allowed for you to make the choice to apply the rollover concessions. | Detailed Reasoning - Question 3: In order to apply the small business rollover, a replacement asset must be acquired within two years after the relevant CGT event. However the Commissioner may extend the replacement asset period in certain circumstances (subsection 104-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997)). The relevant factors in determining whether to extend the replacement asset period are: • there should be evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension • account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension • account must be had of any unsettling of people, other than the Commissioner, or of established practices • there must be a consideration of fairness to people in like positions and the wider public interest • whether there is any mischief involved • a consideration of the consequences. The Commissioner considers it fair and equitable in these circumstances to exercise his discretion to extend the replacement asset period to XX August 20XX.