Private ruling: Compensation and capital gains tax
Date of advice: 27 April 2020
Published: June 2020
Ruling period: Year ending 30 June 2020
Date scheme commenced: 1 January 2020

Ruling: Q1: Will the amount received for the permanent damage be treated as assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the compensation received under the conduct and compensation agreement be treated as capital proceeds? | A2: No | Q3: If the income is deemed revenue in nature would it then be deemed taxable income in relation to their business? | A3: No

Relevant facts and circumstances: Alternative Arrangement for noise from petroleum activities In this agreement: As recently discussed with you, petroleum activities are being conducted on land that is in close proximity to your Property. The exploration company would like to compensate you for any noise disturbance you may experience on your Property from carrying out the drilling and completion (including well stimulation) of one (1) Exploration and Appraisal Well, on the nearby land. It is anticipated that the Activities will be completed over an aggregate period of XX days (Duration of the Noise Disturbance) estimated to commence Quarter X, 20XX to Quarter X, 20XX. Compensation The exploration company will pay you a single lump sum to compensate you for any noise disturbance caused by the Activities, including but not limited to the cost of alternative accommodation, meals and incidentals for the Duration of the Noise Disturbance. The exploration company will pay the Compensation to you within XX business days of the Alternative Arrangement Date. The exploration company will compensate you for any legal costs that you reasonably and necessarily incur in respect of the negotiation and execution of this agreement. The exploration company will compensate you within XX business days of receipt of an itemised bill (which must be invoiced to you and demonstrate the reasonableness and necessity of the legal costs) or the Alternative Arrangement Date, whichever is the later. Alternative Arrangement If signed this agreement represents an alternative arrangement for the purposes of the environmental authority issued under the Environmental Protection Act, in respect of the Petroleum Authority. Notice The exploration company will provide you with at least XX days verbal or written notice before the commencement of the Activities on the nearby land. Term This agreement will commence on the Alternative Arrangement Date and terminate on the earlier of: (a) the completion of the Activities; (b) the date that is X months from the Alternative Arrangement Date; or (c) the date Origin terminates this agreement because you cease to reside on the Property Other Individuals on the Property You warrant that you enter into this agreement on your own behalf and as agent for each other person that may reside on the Property during the Term. The Compensation paid to you under this agreement includes compensation for any Affected Person. You agree that you will not permit another person to become an Affected Person without the Affected Person agreeing to be bound by the terms of this Agreement and you indemnify Origin against any claim by an Affected Person for compensation in respect of the Activities during the Term. You acknowledge that the Compensation is in full and final satisfaction of any claim you, or any other Affected Person, have, or may have, for all noise disturbance caused by the Activities during the Term. Taxation You will be solely liable to pay taxes that may be imposed in relation to the payments made to you under this agreement. All amounts in this agreement do not include GST. The supplier will add the prevailing rate of GST onto all taxable supplies made in connection with this agreement, and the recipient agrees to pay that GST following the receipt of a tax invoice from the supplier. The GST applicable to any taxable supplies made in connection with this agreement is payable at the same time as the consideration for those supplies. Where a party reimburses the other party for an expense or other amount, the reimbursement will be net of any input tax credit the supplier is entitled to claim. In this clause, all terms that are defined in the GST law (as that term is defined in the A New Tax System (Goods and Services Tax) Act 1999 ) have the same meaning in this clause. If the exploration company is required to withhold an amount in respect of tax from a payment made to you under this agreement: (a) the exploration company may withhold the tax from the payment and pay the tax to the relevant taxing authority and such payment will be a good discharge of the exploration company's obligation to pay or provide the amount to you; and (b) You indemnify the exploration company for any loss suffered by the exploration company as a result of the exploration company failing to withhold from the payment an amount in respect of tax, limited to the amount of the tax.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)

Reasons for decision: Detailed Reasoning - Compensation payment as ordinary income and business income: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Compensation paid due to loss and damage or a capital asset, or forgoing a right to sue, in the process of a petroleum authority undertaking petroleum activities on land adjacent to thetaxpayer's land is an isolated transaction. Whether a profit from an isolated transaction is ordinary assessable income according to ordinary concepts depends on the circumstances of the case. Profit from an isolated transaction is generally ordinary income when both of the following elements are present: (a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and (b) the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction (paragraph 6 of Taxation Ruling TR 92/3). Neither of the above elements applies in this situation. The compensation payments were made in accordance to the legislative provisions of the petroleum legislation. Accordingly, the compensation payments paid under the alternative agreement, do not give rise to income according to ordinary concepts or to a profit arising from a profit-making undertaking or plan pursuant to section 6-5 of the ITAA 1997. Consequently the compensation payments will not be assessable income personally or for business purposes under section 6-5 of the ITAA 1997 as the payments do not relate to an underlying asset, but rather relates to a disposal by the taxpayer of the right to seek compensation. | Detailed Reasoning - Exempt income: Exempt income is income on which you don't pay tax. However, certain exempt income may be taken into account when calculating the tax losses of earlier income years that you can deduct and the adjusted taxable income of your dependants. Compensation payments received for the disposal by the taxpayer of the right to seek compensation, would be considered exempt income in the same way as other similar compensation payments for forgoing a right to sue are treated. | Detailed Reasoning - Compensation payments and the capital gains tax (CGT) provisions: Under section 6-10 of the ITAA 1997 some amounts that are not 'ordinary income' are included in your assessable income due to another provision of the tax law. These amounts are 'statutory income'. Statutory income may arise from CGT events as consequence of an eligible claimant being entitled to receive compensation and the loss and destruction of a CGT asset. Taxation Ruling TR 95/35 provides the Commissioner's view as to the CGT consequences of receiving a compensation payment. The ruling states that it is necessary to identify the underlying asset to which the payment relates and what has occurred to that asset. The underlying asset is the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity. If there is more than one underlying asset, the relevant asset is the asset which leads directly to the payment of the amount of compensation. For example, if a taxpayer receives an amount of compensation for the destruction of his or her truck, the truck is the underlying asset. In this instance the surrendered right to seek compensation relates to a personal wrong, injury or illness which you have suffered personally and with be therefore be disregarded under paragraph 118-37(1)(b) of the ITAA 1997.