Private ruling: Capital gains tax
Published: November 2011
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the receipt of compensation be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the receipt of compensation be assessable as a capital gain under section 104-25 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: The property is owned by a family partnership of which your spouse is a partner. Your and your spouse are the sole occupiers of the property. The company is the Tenement Holder and is building a temporary workers campsite on nearby land which will adversely impact on you. You and the Tenement Holder have agreed to enter into an 'Agreement to settle proceedings including alternative arrangements'. You have provided a copy of this document. Key elements are; · The tenement holder has approval for the 'construction, operation, maintenance, occupation, use, decommissioning and rehabilitation of a temporary workers campsite'. · As a result of the activities to be undertaken on this site, the property you occupy has been deemed a 'Sensitive Place' for a particular Term. · The Planning and Environmental Authority enables the tenement holder to enter into 'Alternative Arrangements' with persons who may be affected by nuisance noise emissions. · The effect of an Alternative Arrangement is that the Environmental Authority noise limits will not apply to the property for the period of the Alternative Arrangement. You are to be financially compensated by the tenement holder. In return, you agree that the payment 'shall be in full and final satisfaction of all present and future claims which may have arisen or may arise as a result of noise emissions from the Operations ' and you 'further agree to discharge the Tenement Holder, its contractors, agents and employees from all present and future claims, demands, complaints, costs, losses, damages, liabilities, expenses, actions or proceedings which arise out of noise emissions from the carrying out of the Operations.'

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 108-5

Reasons for decision: Summary: The lump sum payment is not income according to ordinary concepts and is not assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Income: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. 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. In your case the payment is for the surrender of the right to future compensation. The payment does not have the characteristics of ordinary income and was not earned by you and did not relate to services performed. The payment is also a one-off payment and does not have an element of recurrence or regularity. | Summary: Entering into the compensation agreement triggers the CGT event C2. The capital gain will be the difference between the incidental costs and the compensation received. | Detailed Reasoning - Capital gain: Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income. Generally, compensation and settlement payments which do not have the characteristics of income are capital in nature and are considered under the CGT provisions of the ITAA 1997. Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. The definition of a CGT asset in section 108-5 of the ITAA 1997, includes a legal or equitable right that is not property. The right to seek compensation is therefore an asset for the purposes of the CGT provisions. Where the right to seek compensation ends by it being released, discharged or satisfied, then CGT event C2 happens. Any capital gain arising on the disposal of that right is calculated using the cost base of that right. Paragraph 157 of TR 95/35 states that the cost base of the right to seek compensation includes the total acquisition costs incurred as a result of which the right to seek compensation arose. Money and/or property given in respect of the acquisition of the asset come within the cost base if there is a direct and substantial link between the expenditure and the arising of the right to seek compensation. This may include legal costs. In your case, there is no disposal or permanent reduction in value of the underlying land. As such, the compensation is received in respect of your right to seek compensation. Upon receiving the compensation amount, you surrender your right to seek compensation. Therefore CGT event C2 happens at this time. The capital gain will be the difference between the incidental costs, which may include legal fees and charges incurred, and the compensation received.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.