Private ruling: Mining Compensation
Published: March 2015
Ruling period: Income year ended 30 June 2014 | Income year ended 30 June 2015 | Income year ended 30 June 2016 | Income year ended 30 June 2017 | Income year ended 30 June 2018 | Income year ended 30 June 2019
Date scheme commenced: The scheme has commenced

Ruling: Q1: Will the compensation receipts (construction, pre-construction and annual) be assessable as ordinary income as defined by section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the compensation receipts represent capital proceeds of any CGT event in Division 104 of the ITAA 1997? | A2: No | Q3: Will the compensation payment reduce the cost base of the relevant property for any future capital gain under section 110-40 or s110-45 of the ITAA 1997? | A3: Yes | Q4: Will the agreement completion payment be assessable as ordinary income as defined by section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A4: No | Q5: Will the agreement completion payment represent capital proceeds of any CGT event in Division 104 of the ITAA 1997? | A5: No | Q6: Will the agreement completion payment reduce the cost base of the relevant property for any future capital gain under section 110-40 or s110-45 of the ITAA 1997? | A6: Yes

Relevant facts and circumstances: You are the landowner of property 'x' which you use to carry on a primary production business. You have entered into a Conduct and Compensation Agreement (CCA) under a statutory authority with Y to compensate you for Coal Seam Gas related activities carried on your property. The CCA details the agreed authorised activities relevant to the damages caused. Clause x of the CCA along with section x of the statutory authority provides that you have been compensated for the following heads of damage: • deprivation of possession of its surface; • diminution of its value; • severance of any part of the land from other parts of the land; • any cost, damage or loss arising from the carrying out of the activities under the petroleum authority on the land • legal, account and valuation costs incurred in negotiation the CCA. Under the Letter of Offer and the CCA you will receive the following payments: • One off agreement completion payment $x • One off pre-construction compensation $x • One off construction compensation $x • Ongoing annual compensation $x The one off agreement completion payment was conditional on the CCA being signed and returned within 40 business days of the Letter of Offer. The payment was described as follows in the letter of offer:

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 110-40 | Income Tax Assessment Act 1997 section 110-45 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 118-37

Reasons for decision: Summary: The statutory authority establishes a statutory scheme to provide compensation to landowners for the impacts of petroleum and gas production activities; and requires the relevant parties to enter into a CCA. The purpose of the scheme is to ensure that landowners are not financially disadvantaged by activities carried out on their property. Landowners are entitled to compensation for any compensatable effects related to the impact of the activities on their business operations and land use. Payments pursuant to the statutory authority are generally treated as capital in nature where those amounts are compensation payments for compensatable effects. It is considered that characterising the payments as capital in nature is in keeping with the ATO view on the taxation treatment of compensation receipts contained in Taxation Ruling TR 95/35. For the purposes of TR 95/35 it is necessary to identify the underlying asset. TR 95/35 defines an underlying asset: 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. 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 to identifying the underlying asset in the current context. 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 6 of TR 95/35 provides that it is the Commissioner's view that where an amount of compensation is received wholly in respect to permanent damage suffered to a CGT asset of the taxpayer and there is no disposal of the asset, the compensation represents a recoupment of purchase price. The total acquisition costs for the relevant asset should be reduced by the amount of compensation received under section 110-40 or 110-45 of the ITAA 1997. We consider that you have been compensated under section x of the statutory authority primarily for permanent damage to an underlying asset being your property. As the property is not being disposed of, the compensation will reduce the cost base of the property for any future capital gain. | Detailed Reasoning - Agreement completion payment as income: The Agreement completion payment will be ordinary income if there is a sufficient nexus between the amount and an earning activity. In the context of an inducement payment the nexus test is satisfied if the amount is a 'product or incident of employment or a reward for services rendered' ( Scott v Federal Commissioner of Taxation (1966) 117 CLR 514; 24 ATR 527). In these circumstances, to be income the landowner must have provided some form of service in return for receiving the Agreement completion payment. If the Agreement completion payment was merely part of the overall package deal, it would instead be capital. In determining whether the payment is a reward for service the motive of the donor is not determinative, rather the question 'in each particular case is as to the character of the receipt in the hands of the recipient' ( Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; 95 ATC 4691; (1995) 31 ATR 392). On presentation of the offer, the landowner was faced with two alternatives: 1. accept the offer, or 2. after expiration of the required negotiation timeframes make an election to the Land Court seeking an order for compensation. The landowner decided to accept the offer together with the Agreement completion payment. The relationship between the landowner and X was limited to the negotiation and/or determination of compensation. In the hands of the landowner, the compensation under the CCA and the Agreement completion payment comprise in essence one sum of money in return for agreeing to conditions set out in the CCA. The landowner has not provided any service to X. Therefore, the Agreement completion payment cannot be seen as a reward for service and will take in the same character as the amounts received under the CCA. It will be capital. | Detailed Reasoning - Agreement completion payment as compensation: A TR 95/35 contains a broad definition of compensation receipt: A compensation receipt, or compensation, includes any amount (whether money or other property) received by a taxpayer in respect of a right to seek compensation or a cause of action, or any proceeding instituted by the taxpayer in respect of that right or cause of action, whether or not: • in relation to any underlying asset; • arising out of Court proceedings; or • made up of dissected amounts. Notwithstanding the agreement completion payment is paid separately from the CCA and is not described by X as compensation, it can still meet this definition of a compensation receipt. Looked at from the totality of the relationship between the parties, the Agreement completion payment is part of the overall deal that the landowner agrees to. The Agreement completion payment along with the amounts payable under the CCA all form part of the compensation received by the landowner. The Agreement completion payment is part of what results or "moves" the landowner to agree to the CCA. There will be circumstances when an inducement payment is paid because something is provided by the recipient that is additional to agreeing to the offer of compensation. For instance, Example 21 in TR 95/35 involves a situation where an inducement payment is made to expedite the process following the conclusion of an agreement relating to the amount of compensation payable. The inducement payment is treated separately to the compensation. The compensation is treated as relating to the underlying land, while the inducement payment is treated as the right to enter on the land at an earlier time than previously agreed. This case is however distinguishable. There is only one agreement between the parties, that being the agreed compensation. The situation would be different if the compensation amount was determined and then during subsequent dealings the parties agreed to expedite the timing of the original agreement (as is the case with Example 21). Consequently similar to the other compensation receipts received the agreement completion payments will represent a recoupment of purchase price and reduce the cost base of the underlying property.