Private ruling: Capital Gains Tax
Published: February 2015
Ruling period: Income year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the one off payment from the company be assessable as ordinary income? | A1: No | Q2: Will the one off payment from the company represent capital proceeds of capital gains tax (CGT) event A1? | A2: Yes

Relevant facts and circumstances: A company has used a one hectare parcel of your land to secure an environmental offset for damage and clearance to large trees in the construction of infrastructure. You have entered into an agreement with the local council and the company under the relevant environmental legislation. You have received a one off payment of $X from the company for entering into this agreement.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 104-35

Reasons for decision: Summary: To determine whether the receipt of the payment has the character of ordinary income assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or capital proceeds assessable under the CGT regime in Part 3.1 of the ITAA 1997 regard must be had to the totality of your situation and the common law indicators determined by the courts. In GP International Pipecoater Pty Ltd v FCT (1990) 170 CLR 2124; 21 ATR 1 the High Court summarised the relevant indicators, at 1,7: Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. The factors relevant to the ascertainment of the character of a receipt of money are not necessarily the same as the factors relevant to the ascertainment of the character of its payment. None of the above principles are determinative in their own right and the relevance and weight to be given to each principle will depend on the circumstances of the case. In Montgomery v FCT (1999) 198 CLR 639; 42 ATR 475 the High Court provided the following: Each of the general propositions we have mention is qualified; income is often (but not always) a product of exploitation of capital; income is oft (but not always) recurrent or periodical; receipts from carrying on a business are most (but not always) income. In applying the above to your situation we consider that the incentive payment is capital in nature, we have reached this conclusion based on the following reasons: • There is no element of regularity, periodicity or recurrence as the incentive payment is a one off lump sum payment and consequently cannot be relied upon (see FCT v Dixon (1952) CLR 540). • The Commissioner considers that the receipt is not the product of the provision of any personal service, business activity or any passive investment (see Brown v FCT (2002) 49 ATR 301 and MIM Holding Ltd v FCT (1997) 36 ATR 108). • The incentive payment does not flow from the exploitation of any capital asset of the taxpayer but is rather paid in return for a restriction on the rights attached to your ownership of a capital asset being your property. | Detailed Reasoning - Capital Gains Tax: Section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss if, and only if, a CGT event happens to a CGT asset. Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1. It provides that CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) defines a disposal as: You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. Section 104-35 describes another CGT event D1. It provides that CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity. However subsection 104-35(5) provides that D1 does not happen if the right requires you do something that is another CGT event. Taxation Ruling TR 97/3 provides the Commissioner's view on the capital gains tax consequences of compensation received by landowners from public authorities. It provides at paragraph 12 and 13: 12. An amount of compensation may be received by a landowner in respect of a reduction in the value of land resulting from limitations on the owner's use of the land imposed by statute. For example, the Native Vegetation Act 1991 (SA), the object of which is to preserve, enhance and manage native vegetation, limits rights of certain landowners to clear their land. 13. These compensation receipts are treated in the same way as compensation for a compulsorily acquired easement. Here again, there is a loss of some of the rights of ownership of the land. The compensation is treated as consideration in respect of the disposal of those rights, that is, in respect of a part disposal of the underlying land. Consequently CGT event A1 has happened as you have disposed of part of the rights attached to your land. Consequently you may have access to the general CGT discount if you have held the property for longer than 12 months.