Private ruling: capital gains tax - compensation receipt - underlying asset - disturbance payment
Published: November 2011
Ruling period: Income year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Generally, the Commissioner will view that on the disposal of an underlying asset any compensation received as a result of the disposal will be treated as consideration for that disposal. | If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, it is not considered to be income and is therefore not assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). | Application to your case | In your case, you as trustee of the Trust have received an offer to acquire the trust's share in a property. The offer consists of an amount for the purchase of the property and an amount for legal and expert advice, determining the conditions of the sale, and for the disturbance caused by the land acquisition process. | On the facts of this case, it is considered that the amount of compensation that you as trustee will receive has a direct and substantial link with the underlying asset, the property. Accordingly, it is considered that the compensation amount will not received for the disposal of any other asset, such as the right to seek compensation. | The fact that amounts included in the compensation payment are calculated under different headings does not determine the character of the payment. Therefore, the amount for disturbance described in the facts will be received in association with the disposal of the underlying asset, the property, and thus should be considered part of the capital proceeds of the sale of the trust's share in the property in accordance with TR 95/35.


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 116-20

Reasons for decision: Summary: Taxation Ruling TR 95/35 (TR 95/35) outlines the Commissioner's views on how to treat compensation receipts. In TR 95/35, the Commissioner adopts an ``underlying asset'' approach, also known as a ``look-through'' approach, to determine the asset to which the compensation amount is most directly related. Generally, the Commissioner will view that on the disposal of an underlying asset any compensation received as a result of the disposal will be treated as consideration for that disposal. If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, it is not considered to be income and is therefore not assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Application to your case: In your case, you as trustee of the Trust have received an offer to acquire the trust's share in a property. The offer consists of an amount for the purchase of the property and an amount for legal and expert advice, determining the conditions of the sale, and for the disturbance caused by the land acquisition process. On the facts of this case, it is considered that the amount of compensation that you as trustee will receive has a direct and substantial link with the underlying asset, the property. Accordingly, it is considered that the compensation amount will not received for the disposal of any other asset, such as the right to seek compensation. The fact that amounts included in the compensation payment are calculated under different headings does not determine the character of the payment. Therefore, the amount for disturbance described in the facts will be received in association with the disposal of the underlying asset, the property, and thus should be considered part of the capital proceeds of the sale of the trust's share in the property in accordance with TR 95/35.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Subject: capital gains tax - compensation receipt - underlying asset - disturbance payment: Question: Will the amount received as compensation for disturbance form part of the capital proceeds received on the disposal of the trust's share in the property? | Relevant facts: In this case, you as trustee of the Trust, have received an offer to purchase property owned in part with Entity A. The offer consisted of the following amounts: | o An amount for the purchase of the property; and | o An amount for the relocation costs incurred by the sellers, obtaining legal and expert advice for determining the acquisition price of the property and the terms upon which it is acquired, and compensation for disturbance caused by the land acquisition process. | The property consists of a number of lots, with all of the property being used for agricultural purposes from the date of acquisition until the present time. | You have provided a copy of the following document, which forms part of, and should be read in conjunction with this private ruling: | o Contract for sale of land for property.