Private ruling: CGT - compensation
Published: March 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the compensation amount payable to you under an agreement between yourself and another party assessable under the capital gains tax provisions? | A1: No.

Relevant facts and circumstances: Before you commenced a primary production activity on your land you sought advice from an industry professional on the best practices to conduct the activity and acted on that advice. However the activity did not proceed as expected. A report was prepared for you for the purposes of legal proceedings against the industry professional. The purpose of the report was to provide an expert opinion on, amongst other things, the extent of damage done as a result of advice given by the industry professional. The report stated due to the significant damage the activity was a complete failure. You settled this legal action where the industry professional agreed to pay you a sum un-dissected in full settlement of the claims you brought against them.

Relevant legislative provisions: Income Tax Assessment Act 1997 s ection 6-10

Reasons for decision: Summary: Taxation Ruling TR 95/35 states at the following paragraphs; 6. 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. 7. Accordingly, the total acquisition costs of the post-CGT asset should be reduced in terms of subsection 160ZH(11) by the amount of the compensation. No capital gain or loss arises in respect of that asset until the taxpayer actually disposes of the underlying asset. If, in the case of a post-CGT underlying asset, the compensation amount exceeds the total unindexed acquisition costs (including a deemed cost base) of the underlying asset, there are no CGT consequences in respect of the excess compensation amount. TR 95/35 also explains at paragraph 3 that permanent damage does not mean everlasting damage, but refers to damage which will have permanent effect unless some action is taken to put it right. In your circumstances the payment received relates to permanent damage to an underlying asset (the land). The compensation is treated as a recoupment of all or part of the acquisition cost of the asset. The cost base of the asset is reduced to the extent of the consideration and any gain or loss will crystallise at the later time when the asset is sold.