Private ruling: Compensation payment

Ruling: Is the compensation payment taxable as ordinary income? | No. | Is the compensation payment taxable under the capital gains tax (CGT) provisions? | No. | Year ended 30 June 2011. | Year ended 30 June 2012. | 1 July 2010. | Your property is located close to mining operations. | You will be receiving compensation in relation to leaving the property vacant for a period of time. | You agree that the noise and dust from the mining operations will reduce the value of the property. | Income Tax Assessment Act 1997 Section 6-5, Income Tax Assessment Act 1997 Section 104-155, Income Tax Assessment Act 1997 Section 110-25 and Income Tax Assessment Act 1997 Section 110-55. | Is the compensation payment taxable as ordinary income? | Your assessable income includes income according to ordinary concepts. To determine whether a compensation payment is subject to taxation you must first identify whether the payment is income or capital in nature. The payment may be assessable as income if it is paid to compensate for loss of profits or income that might have been derived from the property. | In this case the property is not used to produce assessable income and no part of the amount that you receive will be compensation for loss of profits or income. Therefore the compensation payment will not be taxable as ordinary income. | Is the compensation payment taxable under the CGT provisions? | As the compensation payment will be capital in nature it is necessary to consider the CGT implications. | You make a capital gain or capital loss if a CGT event happens to a CGT asset. To determine any CGT implications you must establish the nature of the asset to which the compensation payment relates. | Taxation Ruling TR 95/35 provides guidance as to the treatment of compensation payments. TR 95/35 states that the particular asset for which the compensation has been received may be: | · an underlying asset | · a right to seek compensation; or | · a notional asset | In determining the most relevant asset, it is appropriate to adopt a look through approach to the transaction or arrangement which generates the compensation payment. | In this case, using the look through approach, the compensation payment relates to permanent damage and reduction in value of the underlying asset (the property). Permanent damage or reduction in value does not mean everlasting damage or reduced value, but refers to damage or reduction in value which will have a permanent effect unless some action is taken by the taxpayer to put it right. | Where an amount of compensation is received in respect of permanent damage or reduction in value of an underlying asset acquired after 20 September 1985 and there is no disposal of that underlying asset at the time of the receipt, the payment will not be taxable under the CGT provisions. | Please note: the cost base and reduced cost base of the underlying asset, in your case the property, will need to be reduced by the amount of the compensation payment that you receive. However, where a property is your main residence for your entire ownership period, any capital gain or capital loss that you make when you dispose of it is disregarded.




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