Private ruling: Compensation payment - reduction in value of underlying asset
Date of advice: 26 November 2019
Published: January 2020
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the payment be assessable as income or a capital gain? | A1: No. | Q2: Will the payment reduce the cost base/reduced cost base of the property for any future capital gain/loss? | A2: Yes.

Relevant facts and circumstances: You carry on a business on a property you own. A windfarm is located near the property. You main residence is also on the property with a direct view of X wind turbines. Your dwelling is approximately X kilometres from the nearest wind tower and X towers are within X kilometres of the dwelling. Under the planning permit for the windfarm the windfarm owners must take action to mitigate the visual interference of the turbines for all residents within 3km of the boundary of the windfarm. You were contacted by the manager of Company A to offer to plant trees to screen the turbines, or you could receive $XX and plant the trees yourself. You opted to receive the $XX and have started to plant and cultivate your own tree screening.

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

Reasons for decision: Summary: Taxation Ruling TR 95/35 provides the Commissioner's view on the taxation implications of compensation receipts. Accordingly, 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. Applying the 'look-through' approach in your circumstances, the most relevant asset to which the compensation amount most directly relates is the property. If an amount of compensation is received wholly in respect of permanent damage suffered to a post-CGT underlying asset or for a permanent reduction in the value of a post-CGT underlying asset, 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. Permanent damage or reduction in value does not mean everlasting damage or reduced value, but refers to damage or a reduction in value which will have permanent effect unless some action is taken to put it right. The cost base/reduced cost base rules are found in Division 110 of the ITAA 1997. Expenditure does not form part of any element of the cost base or reduced cost base to the extent of any amount you have received as recoupment of it, except so far as the amount is included in your assessable income (subsection 110-45(3) and subsection 110-55(6)). It is considered that you have been compensated primarily for the reduction in value of your property due to the proximity of the wind turbines and their visibility from your property. The compensation payment is not considered ordinary income and is therefore not assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). In this instance as there is no disposal of the property at the time of receipt the payment represents a recoupment of part of the acquisition costs of the property and is treated as a reduction of the cost base/reduced cost base of the property and will be taken into account for any future capital gain/loss.