Private ruling: Mining Compensation
Published: December 2014
Ruling period: Income year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the compensation payments be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the compensation payments represent capital proceeds of any CGT event under Division 104 of the ITAA 1997? | A2: No | Q3: Will the entire amount of the compensation payable represent a recoupment and consequently reduce the cost base of the asset under subsection 110-40(3), 110-45(3) or 110-55(6) of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: You are the landowner of property which you use carry on the business of livestock farming. You have entered into an agreement under a statutory scheme with a company to compensate you for the construction of infrastructure on your land. The agreement details the agreed authorised activities relevant to the damages caused. You entered into a variation agreement to extend the authorised activities and receive further compensation. The agreement along with the statutory scheme 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 on the land.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 subsection 110-40(3) | Income Tax Assessment Act 1997 subsection 110-45(3) | Income Tax Assessment Act 1997 subsection 110-55(6)

Reasons for decision: Summary: For taxation purposes a compensation receipt normally assumes the nature of that which it is designed to replace. If the compensation replaces income then it will be assessable as an ordinary income, alternatively where compensation is paid in respect of a loss of, or damage suffered to a capital asset then it will be a capital in nature. Taxation Ruling TR 95/35 provides the Commissioner's View on the capital gains tax (CGT) consequences of a compensation receipt. According 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. Once the relevant asset is identified, then it is appropriate to determine whether there is an actual or part disposal of the asset. If there is a disposal of the asset then the compensation will represent consideration received for the disposal of the asset. If in the alternative there is no disposal the amount will represent a recoupment of purchase price under subsection 110-40(3), 110-45(3) or 110-55(6) of the ITAA 1997 depending on when the property was acquired and if you make a capital gain or loss on the sale. Having regard to your entire factual circumstance we consider you have been compensated primarily for the permanent damage and reduction of value in an underlying asset being your property. Consequently the compensation will not be assessable as ordinary income or represent capital proceeds. However the compensation will be treated as a recoupment of the purchase price and reduce the cost base of the asset for any future CGT event.