Private ruling: Mining compensation
Published: March 2015
Ruling period: Income year ended 30 July 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the compensation payments under the Make Good Agreement be assessable as ordinary income as defined by section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will compensation payments under the Make Good Agreement represent capital proceeds of any CGT event in Division 104 of the ITAA 1997? | A2: No | Q3: Will the compensation payment under the Make Good Agreement 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

Relevant facts and circumstances: You are the landowner of property used to carry on a business. You have entered into a compensation agreement to decommission a water bore on your property. The contract details the agreed authorised activities relevant to the damages caused. The agreement provides that you have been compensated for the "impaired capacity" to the land. Impaired capacity is defined under the section 412 of the Water Act 2000 as: "412 When does a water bore have an impaired capacity (1) An existing water bore has an impaired capacity if- (a) there is a decline in the water level of the aquifer at the location of the bore because of the exercise of underground water rights; and (b) because of the decline, the bore can no longer provide a reasonable quantity or quality of water for its authorised use or purpose."

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 Division 104 | Income Tax Assessment Act 1997 section 110-40 | Income Tax Assessment Act 1997 section 110-45

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 permanent damage to an underlying asset being your agricultural land. It is clear that the reduction in the availability of water will significantly reduce the value of this land for its intended purpose. Consequently the compensation payments will not be assessable income under section 6-5 of the ITAA 1997 as the payments relate to a capital asset. In this instance as per the Commissioner's view in paragraph 6 of TR 95/35 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 section 110-40 or 110-45 of the ITAA 1997 as a recoupment of purchase price.