Private ruling: Compensation payment
Date of advice: 6 August 2025
Published: 20 October 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: DD MM 20YY

Ruling: Q1: Is the compensation payment you received in relation to establishing a nature reserve on part of your property in Country Z included in your assessable income? | A1: No. | Q2: Did Capital Gains Tax (CGT) disposal event A1 happen to you when you entered into the agreement to establish a nature reserve on part of your property? | A2: Yes.

Relevant facts and circumstances: You own a rural property in Country Z. The property includes X.X hectares of rare, mature natural forest. The type of forest represents just X% of the forest cover remaining in Country Z. Both the Country Z government and XXX XXX conservation bodies are addressing the preservation of these types of forest. In XXX 20XX you made the decision to rezone the X.X hectares of forest as a permanent nature reserve with the Country Z environment agency, XXX. This decision was not based on financial gain but your wish to preserve a rare habitat. With the rezone, you would in perpetuity be unable to degrade or damage the land in anyway and would have to forfeit any commercial benefit from the land. You received a one-off compensation payment of EUR XXX tax-free The rezoning application was accepted on XX XXX 20XX. You received a one-off compensation payment of EUR XXX which is tax-free in Country Z. You received the compensation payment into your Country Z bank account on XX XXX 20XX. The payer was XXX, the Country Z XXX XXX for XXX, XXX and the XXX. You have provided the original Decision to Establish a Nature Reserve issued by the XXX for XXX XXX, XXX and XXX document in XXX and the translation to English documents. The documentation provided states that the ownership of the land stays with the owner of the forest, but the trees will be permanently protected. The compensation is calculated according to the number of trees in the stand.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-15 | Income Tax Assessment Act 1997 section 104-10

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes income according to ordinary concepts (ordinary income) derived from all sources, whether in or out of Australia, during the income year. Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: • are earned, • are expected, • are relied upon, or • have an element of periodicity, recurrence or regularity In your case, the lump sum compensation payment you received does not have the characteristics of ordinary income and you are not required to include the payment in your income tax return as assessable income. CGT event A1 in section 104-10 of the ITAA 1997 happens if you dispose of a CGT asset or part of an asset. Taxation Ruling TR 97/3 Income Tax: capital gains: compensation received by landowners from public authorities (TR 97/3) provides guidance on situations where a landowner receives certain compensation from a public authority. TR 97/3 refers to paragraph 4 of Taxation Ruling TR 95/35 about compensation receipts which states that: "If an amount of compensation is received by a taxpayer wholly in respect of disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation." In applying the above approach, an amount of compensation received by a landowner for the loss of part of the rights of ownership is accepted as being compensation received in respect of the past disposal of the underlying asset (the land). The amount is not consideration for the disposal of the right to seek compensation (paragraph 8 of TR 97/3). | Detailed Reasoning - Compensation received by a landowner under a statue which imposes a limitation on the owners' use of the land: Paragraph 12 - An amount of compensation may be received by a landowner in respect of a reduction in the value of land resulting from limitations on the owner's use of the land imposed by statue. For example, the Native Vegetation Act 1991 (SA), the object of which is to preserve, enhance and manage native vegetation, limit rights of certain landowners to clear their land. Paragraph 13 - These compensation receipts are treated in the same way as compensation for a compulsory acquired easement. Here again, there is a loss of some of the rights of ownership of the land. The compensation is treated as consideration in respect of the disposal of those rights, that is, in respect of a part disposal of the underlying land. You make a capital gain if the capital proceeds from the disposal of part of the CGT asset are more than the asset's cost base. You have a capital loss if those capital proceeds are less than the asset's reduced cost base. In your case, when you entered into the agreement to establish a nature reserve on part of your land, you are deemed to have disposed of part of the asset as you lost some of the rights of ownership of the land, which is that you no longer have commercial use of the stand of trees which is the part of the asset. You will need to work out a reasonable apportionment of the value of the land that is subject to the agreement in order to calculate the first element of the cost base that relates to the original purchase price of the land.