Private ruling: Assessability of compensation payment
Published: January 2014
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the weekly accommodation allowance payments be assessable as ordinary income? | A1: Yes. | Q2: Will the weekly disturbance allowance payments be assessable as ordinary income? | A2: Yes. | Q3: Will the one-off lump sum compensation payment be taxable as ordinary income? | A3: No. | Q4: Will the compensation payment be taxable under the capital gains tax provisions? | A4: Yes.

Relevant facts and circumstances: Your property is located close to mining operations. The property is held in both your names. Mining operations will be conducted in the vicinity of your residence. You have been offered a lease agreement whereby you and your family reside at alternative accommodation for a period of time while these mining activities are carried out. You will be provided with compensation in relation to leaving your property vacant for a stated period of time. The compensation contract is in both your names. You will receive the following amounts: a) a weekly accommodation allowance, indexed annually; b) a weekly disturbance allowance for the family; and c) a one off up-front compensation payment. The amounts payable under paragraphs a) and b) above will commence four weeks prior to the commencement of the mining activities and subsequent payments will be made four weekly in advance thereafter. The compensation payment under paragraph c) above will be made as a one off payment four weeks prior to the commencement of the mining activities. A clause of the lease agreement requests that you agree and acknowledge that: (a) the carrying out of Mining Activities in the vicinity of your Residence may result in the commission of a private nuisance by noise, dust or otherwise; and (b) you (including any person claiming through you) will not commence or enforce any action whatsoever against the relevant companies in respect of such private nuisance. In addition, you will be reimbursed the amount of any increase in your house and contents insurance for your property, resulting from your property being vacant. You agree that the noise and dust from the mining operations will reduce the value of the property. The property has never been used to produce income.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-35 | Income Tax Assessment Act 1997 Section 110-35 | Income Tax Assessment Act 1997 Subsection 115-25(3) | Income Tax Assessment Act 1997 Section 118-37

Reasons for decision: Detailed Reasoning - Ordinary income: Please note that all references are to the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 6-5(1) explains that your assessable income includes ordinary income and defines ordinary income as income according to ordinary concepts. The legislation does not provide any specific guidance on what is meant by income according to ordinary concepts however, the courts have identified a number of factors which indicate whether an amount has the character of income according to ordinary concepts. These include: · it is earned; · it is received regularly or periodically; · it is expected; and · it is relied upon. It is not necessary for all of these characteristics to be present for a receipt to be considered ordinary income. Subsection 6-5(2) further explains that your assessable income includes such ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during each financial year. Section 6-10 advises that your assessable income also includes some amounts that are not ordinary income. This income is referred to as statutory income. Statutory income from all sources in or out of Australia is also included in the assessable income of an Australian resident and includes net capital gains. As a result of signing a 'Lease Agreement' you will be in receipt of two regular weekly payments in the form of an accommodation allowance and a disturbance allowance. According to the Macquarie Dictionary Fifth Edition (online) a 'lease' is: 1. An instrument transferring property to another for a definite period, or at will, usually in consideration of rent or other periodical compensation. 2. To grant the temporary possession or use of to another, usually for compensation at a fixed rate. 3. To take or to hold by a lease, as a flat, house, etc. Although the agreement is called a 'Lease' agreement, it does not give the relevant companies the right to access or to use your residence as would a true lease agreement. It merely asks that you reside at alternative accommodation for a period of time while mining and associated operations are conducted in the area. The regular and expected payments will be earned by you in line with your agreement to reside at alternative accommodation. In accordance with the character of income according to ordinary concepts as outlined above, these two weekly payments will be assessable under subsection 6-5(2). | Detailed Reasoning - Capital gains tax: Section 102-20 explains that you incur capital gains tax (CGT) when a CGT event takes place and a capital gain or a capital loss is made from that event. A capital gain is added to any other assessable income you have earned during the applicable financial year and you are taxed at your marginal tax rate on the total of your income. Division 118 sets out various exemptions for many capital gains and losses. | Detailed Reasoning - Lump sum compensation - meaning of compensation: Compensation is defined in the Macquarie Dictionary Fifth Edition (online) to mean: "1. the act of compensating. 2. something given or received as an equivalent for services, debt, loss, suffering, etc; indemnity." The term 'compensation' is not limited to money and also covers the money value of property or other consideration obtained by a taxpayer. As a general rule, the nature of a payment of compensation follows the nature of whatever is being compensated. For example, compensation received for the loss of income is generally assessable as ordinary income. On the other hand, compensation received for lost income-producing capacity, is of a capital nature and not assessable as ordinary income but assessable as statutory income under section 6-10 unless there is an exemption that prevents it being assessable. An undissected lump sum compensation receipt is any amount of compensation received where the components of the payment have not been itemised and cannot be determined. Paragraph 18 of TR 95/35 Income tax: capital gains: treatment of compensation receipts states if the amount of compensation received is an undissected lump sum, the whole amount is treated as being consideration received for the disposal of the right to seek compensation under section 104-35. For the CGT provisions to apply to compensation amounts, a CGT event must be identified. Generally, receipt of a compensation amount will give rise to one of the following CGT events: · A1 (disposal of a CGT asset); · C1 (loss or destruction of a CGT asset); · C2 (cancellation, surrender and similar endings); · D1 (creating contractual or other rights); or · H2 (receipt for event relating to CGT asset). The agreement will not cause the disposal, loss, destruction or cancellation of a CGT asset. Rather, the agreement will create a contractual right whereby you and your family will consent to reside at alternative accommodation for a period of time while mining and associated operations are conducted in the vicinity of the Residence. This will trigger a CGT event D1 under section 104-35 which will take place when you enter into the agreement. The capital proceeds from the event will include money (but not rent) and the value of any property you receive. You will make a capital gain if the capital proceeds from creating the right are more than the incidental costs incurred in creating it. If the capital proceeds are less than the incidental costs, a capital loss is made. As section 104-35 makes no reference to the cost base and reduced cost base of a right, the rules in Division 110 to 114 about cost base and reduced cost base do not apply. Any capital gain or loss from CGT event D1 is made solely by reference to the incidental costs of creating the rights. Incidental costs are defined in section 110-35. Essentially, incidental costs are made up of: · remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser · the costs of transfer · stamp duty or other similar duty · advertising costs · costs of valuation or apportionment · search fees relating to a CGT asset · cost of a conveyancing kit · borrowing expenses such as loan application fees and mortgage discharge fees · expenditure incurred by the head company of a consolidated or MEC group relating to a CGT asset because of an intra-group transaction, and · termination fees resulting from the end of a CGT asset ownership. | Detailed Reasoning - CGT exemptions and concessions: The CGT rules contain various types of relief or exemptions and includes section 118-37. This section states that a capital gain or capital loss you make from a CGT event is disregarded if it relates to compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally. The agreement does not qualify for an exemption under 118-37 as a personal injury or illness and we will examine the meaning of 'wrong' as it applies in these circumstances. 'Wrong' is defined in the Macquarie Dictionary Fifth Edition (online) to mean "That which is wrong, or not in accordance with morality, goodness, justice, truth or the like; evil". In TR 95/35 the Commissioner has adopted an 'underlying asset' approach (also known as a 'look-through' approach) to determine the asset to which the compensation amount is most directly related. It contains examples of instances where compensation has been paid for a 'wrong' under section 118-37. The following is a list of claims that may qualify for exemption, provided other relevant requirements of the provision are met: · Breach of privacy · Defamation · Discrimination · Loss of companionship · Loss of financial support · Libel · Nervous shock · Out-of-court settlement · Professional humiliation and embarrassment · Professional negligence regarding a personal injury claim · Sexual harassment · Slander · Wrongful dismissal. When we examine the meaning of 'wrong' and the list of relevant claims for which compensation payments have been made and which qualified for exemption under 118-37, there are none that compare with your circumstances. Consequently, the $X lump sum compensation payment you will receive will not be exempt from the CGT provisions. Division 115 provides a general discount on their capital gain for eligible taxpayers. In order to qualify, the following eligibility conditions, as they apply to your circumstances, will need to be satisfied: · you must be an individual or a trust and not a company; · the capital gain must not be calculated by reference to an indexed cost base; · the CGT asset involved must have been held for at least 12 months; and · the CGT event must not be an ineligible CGT event. In addition, only certain capital gains are eligible for the CGT general discount. Subsection 115-25(3) explains that a capital gain made from CGT event D1 cannot be a discount capital gain as the event results in the creation of a new asset in which case the 12-month holding period requirement cannot be satisfied.