Private ruling: Mining compensation
Date of advice: 2 July 2015
Published: July 2015
Ruling period: Year ended 30 June 2015 til year ended 30 June 2020
Date scheme commenced: 1 July 2014

Ruling: Q1: Do the receipts under the Agreement constitute assessable income in accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: To the extent the receipts under the Agreement do not constitute assessable income in accordance with section 6-5 of the ITAA 1997 will the receipt of these amounts constitute capital proceeds under Division 116 of the ITAA 1997 in respect of a CGT event happening? | A2: No. | Q3: To the extent the receipts under the Agreement do not constitute assessable income in accordance with section 6-5 of the ITAA 1997 and do not constitute capital proceeds under Division 116 of the ITAA 1997 in respect of a CGT event happening does any compensation received reduce the cost base of the property under subsection 110-45(3) of the ITAA 1997? | A3: Yes. | Q4: To the extent the receipts under the Agreement do not constitute assessable income in accordance with section 6-5 of the ITAA 1997 and do not constitute capital proceeds under Division 116 of the ITAA 1997 in respect of a CGT event happening and the compensation received exceeds the cost base of the property are there any immediate capital gains consequences associated with that excess? No.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • the application for private ruling, and • the documents provided with the application for private ruling. The individuals own property used in a farming operation. The landholders have entered into an Agreement for the purposes of compensating for the impact of certain activity on the land. The Agreement provides an upfront compensation payment and annual payments (escalated annually by CPI). The relevant act in the circumstances is the Petroleum and Gas (Production and Safety) Act 2004. It is anticipated that during the construction period and for the duration of the ongoing activities carried on the land that there will be a significant impact on the quality of life for people living on the land due to noise, traffic, dust and light such that the former quite enjoyment of the property will no longer exist.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 110-45(3) | Income Tax Assessment Act 1997 section 110-55(6) | Income Tax Assessment Act 1997 Division 116

Reasons for decision: Summary: Taxation Ruling TR 95/35 provides the Commissioner's view on the taxation implications of compensation receipts. Accordingly, 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 you have been compensated primarily for the reduction in value to 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 relate to a capital asset. | Detailed Reasoning - Question 2, 3 & 4: In this instance where there is no disposal of the underlying asset the receipts will instead amount to a reduction of the cost base of the relevant asset under subsection 110-55(6) of the ITAA 1997 as a recoupment of the purchase price. Additionally paragraph 133 of TR 95/35 provides that any recoupment that exceeds the cost base of the property will not represent a taxable capital gain and, there will be no immediate capital gains tax consequences in respect of any excess.