Private ruling: Tax treatment of conduct and compensation agreement payments.
Date of advice: 27 April 2020
Published: June 2020
Ruling period: 01 July 2018 to 30 June 2028
Date scheme commenced: 01 July 2018

Ruling: Q1: Do the compensation receipts, received under the Conduct and Compensation Agreements (CCAs) from XXXX and XXXX, that relate to permanent damage to land and improvements on land constitute assessable income in accordance with s 6-5 Income Tax Assessment Act 1997 (ITAA97)? | A1: No | Q2:  | A2: No | Q3:  | A3: Yes | Q4:  | A4: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You have provided us with the following relevant facts and information: Your names are XXXX & XXXX and you jointly own a significant amount of land in X state. You have individually and jointly entered into a significant number of Conduct and Compensation Agreements (CCAs) with XXXX and XXXX. The purpose was to compensate you for the impact of XXXX activity on the land owned by you. XXXX Pty Ltd is included on those agreements as being the "occupier" of the land. You are the sole directors and shareholders of XXXX Pty Ltd and this entity leases the land from you (on an arm's length basis) to carry on grazing and pastoral activities on the land with the primary activity carried on the land being a 'XXXX" operation. You are both employed by XXXX and you include the lease income received for the land from XXXX in your assessable income of your partnership entity. Your long-term goals are to increase the breeder numbers to a sustainable level with a high content of X breeders, purchase additional properties to accommodate the expanding herd and to improve all properties in order to achieve full production from the land. To be able to maintain and expand the herd top class pasture management is critical. You believe that your business goals can be achieved through allowing pasture to self-seed every five years, continuing with re-growth control, stick raking on some of the land to improve the pasture quality, control weed growth. Conduct and compensation agreements (CCAs) have been entered into with XXXX and XXXX relating to impacts on the four properties. The CCA provides in the general conditions that: This Agreement: a. is a conduct and compensation agreement under the Petroleum Legislation; b. includes an alternative arrangement for Noise Impacts under the Environmental Authority; c. includes a Waiver of Entry; and d. replaces the Previous Agreements on and from the Agreement Date. The term Petroleum Legislation (in the above extract) means the Mineral and Energy Resources (Common Provisions) Act 2014 (Qld) and, where the context requires, the Petroleum and Gas (Production and Safety) Act 2004 (Qld) and the Petroleum Act 1923 (Qld) (as amended and replaced). Section 81 of the Mineral and Energy Resources (Common Provisions) Act 2014 defines the general liability of the resource authority holder (XXXX) to compensate each owner/occupier of private and public land that is in an authorised area, for any compensatable effect the eligible claimant suffers as a result of authorised activities carried out by the holder or a person authorised by the holder. Subsection 4 of section 81 goes on to define "compensatable effect" as follows: Compensatable effect means all or any of the following: (a) all or any of the following relating to the eligible claimant's land- (i) deprivation of possession of its surface; (ii) diminution of its value; (iii) diminution of the use made or that may be made of the land or any improvement on it; (iv) severance of any part of the land from other parts of the land or from other land that the eligible claimant owns; (v) any cost, damage or loss arising from the carrying out of activities under the resource authority on the land; (b) accounting, legal or valuation costs the claimant necessarily and reasonably incurs to negotiate or prepare a conduct and compensation agreement, other than the costs of a person facilitating an ADR; (c) consequential damages the eligible claimant incurs because of a matter mentioned in paragraph (a) or (b). The CCA provides that XXXX will compensate/reimburse the landholder under the Petroleum Legislation for reasonable and necessary accounting, legal and valuation costs incurred negotiating the agreement. Clause 10 of the CCA provides that XXXX must pay compensation to the landholder in the amount and time set out in Schedule 1 to the CCA while Clause 12 outlines what the compensation is designed to cover. Essentially the compensation is designed to cover the compensatable effects which include the deprivation of the surface of the land, the diminution in the value of the land and the diminution in the use that may be made of the land or any improvement on the land. Compensation to be paid The compensation to be paid is set out in Schedule 1 to the CCA and provides that XXXX will pay the following compensation to the landholder: 1. XXXX will pay the Landholder as follows: Summary Amount Timing for Payment CPI Adjustment a. Negotiation Costs $XXXX as a one off payment for legal, accounting and valuation costs reasonably and necessarily incurred by the landholder in respect of the negotiation of the agreement Payable once within 30 Business Days of the Agreement Date N/A b. Year 1 $XXXX Payable once within 30 Business Days of the Agreement Date N/A c. Ongoing $XXXX per annum Payable in advance on or before each anniversary of the Agreement Date starting from the first anniversary of the agreement date until the end of the term. Each annual payments falling due on or after the second anniversary of the Agreement Date must be varied by the CPO Formula. Activities proposed to be carried out Schedule 2 to the CCA identifies continuing activities and petroleum production activities that are proposed to be carried out on the land under the CCA. Petroleum production will include all activities reasonably associated with or incidental to the placement of seven CSG wells on the land. These activities have already taken place on the land and the land has already suffered permanent damage. The homestead used by the landholder is located on XXXX and there is a significant concern in relation to the impact that noise may have on the quiet enjoyment of the homestead, during both the construction and operational phase. Clause 27 to 31 of CCA contains provisions in relation to noise while Schedule 4 additionally provides guidance in relation to noise impacts. It is acknowledged that unauthorised damage may occur during the course of the construction activities and Clause 32 and 33 of the CCA provide that the repairs should be performed by X within a reasonable period or alternatively the landholder may repair the damage and should be compensated for the reasonable costs of undertaking the repairs. Based on the definition of high risk activities it would appear reasonable to conclude that the landholder will only be able to cultivate or plough to a depth of 300mm close to a right of way or area of activity. The definitions in Schedule 5 define an area of activity to mean an area of infrastructure and given that the gathering system is part of the infrastructure the landholder will be limited to cultivating and ploughing to a depth of 300mm in this area. Clauses X to X provide that the infrastructure remains the property of XXXX and that the landholder should not interfere with or damage the infrastructure or carry out high risk activities that have the potential to damage the underground infrastructure. High risk activities are defined to include activities that are likely to jeopardise the safety of persons, or damage or interfere with XXXX's Infrastructure, including on a right of way or within a radius of 10 metres of an area of activity. Based on the definition of high risk activities it would appear reasonable to conclude that the landholder will only be able to cultivate or plough to a depth of 300mm close to a right of way or area of activity. The fact that access can be made to the land by all equipment and vehicles means that the natural weed bio-security barrier has been broken or permanently damaged. The CCA further provides for various things including dispute resolution, dealing with changes of ownership or creating new interests in land, delivering notices, the requirement of XXXX and the landholder to have an appropriate level of insurance and some general provisions. The management of livestock was discussed during the agreement negotiations and the landholder confirmed that they would work collaboratively with XXXX to develop a robust livestock management plan. Additionally, should there be any concern with the appropriate management of livestock the landholder has other land proximate to the CSG activities so that some or all of the livestock can be relocated temporarily during the construction period if it is considered necessary. In your application, you have stated that it is evident from the foregoing information and analysis that the permanent impacts for which the compensation is to be received in accordance with the CCAs is very extensive. Additionally, given that the actual activities that will be carried out on the land over the term of the agreements may be different to the proposed activities the full impact of the actual activities is difficult to determine at this time. Notwithstanding, it is appropriate to determine on the basis of the foregoing information that the land will be permanently damaged and reduced in value as a result of the CSG activities being carried out on the land. The construction of gas well sites, drilling, testing, operation and ongoing access to the well sites has potential soil compaction/disturbance due to installation and re-working of the well site. There is a potential contamination of the soil due to pooling of waste water proximate to the wells and there may be long term effects from this contamination. There is also a risk of noxious weed infestation at the well sites. Land to which access and use can be made once construction is completed includes land over and proximate to the water and gas gathering system but for which the productive capacity is permanently compromised due to the soil damage during the pipe laying process and the inability to maintain soil structure on a long term basis. Category 4 land is described as restricted due to the fact that the landholder can undertake only a restricted number of activities on the land. This category of land may also include pasture near compaction of soils as a result of the road construction in addition to the impact of frequent traffic causing dust and other disruption to people, pasture and livestock. The CCA negotiations took into account the negative stigma of having CSG activity on the land which includes the concept of blight on the land where the land has an unwelcome attribute and depresses the overall value of the property. The impact of the blight on the land will include the diminution in the long-term market value of the land as a result of having industrial CSG activities on the land. Due to the general inconvenience from the presence of structures on the land it will generally take longer to undertake common pastoral and farming activities including the management and movement of livestock and undertaking common farming tasks. The presence of the CSG mining activity has impacted and will continue to impact the existing quality of life, lifestyle, quiet enjoyment or amenity for the human inhabitants on the property. The visual impact of viewing the wells and other infrastructure will be ever-present; additional people in the district during the construction period (and ongoing) and so potentially a sense of diminished personal safety in a formerly remote area. There is potential reduction to the value of farm output due to the risk of contamination to farm output (soil and other chemical contamination impacting on livestock or crops produced); risk to or reduction in the value of market status such as exports etc. With highly regulated commodities the public is very vigilant of the environment in which commodities are produced. If the value of farm production fell due to any of the above factors, then this would have a direct impact on the value of the business carried on the land and so result in a permanent reduction in the value of the land on which grazing activities to produce the high quality cattle are carried on by the landholder. You believe that there is a permanent reduction in the potential net income possible from agricultural/pastoral activities such as the ones carried out by the landholder. This permanent reduction in profitability will be directly reflected in a reduction in the value of the land. In relation to the bio-security control for the livestock run on the property the former natural barriers of remoteness and limited entry by parties outside the normal farm traffic are permanently damaged due to the high volume of traffic that on an on-going basis will come and go through the property as a result of the mining activity. In other words, the natural bio-security barriers/controls have ceased to exist and any measures to maintain an acceptable level of bio-security are very costly but these measures cannot mend the permanent damage that has already been done to the natural bio-security defences of the property. Water extracted as part of the gas extraction process will reduce the overall level of water in the aquifer which services the bores on the farm. Where the construction activities impact on water flows on the property then the ability to keep the dams used to water the livestock filled may be compromised. You have stated that in the context of the compensation in the XXXX CCA, it is accepted that the compensation is entirely for the permanent damage to the land. Accordingly, you believe that all of the compensation is designed to compensate the owner of the land for the permanent damage to their land. All of the compensation for permanent damage to the land belongs to you both (XXXX & XXXX respectively) and no amount of the compensation belongs to XXXX Pty Ltd.

Relevant legislative provisions: Income Tax Assessment Act 1997, section 6-5 | Income Tax Assessment Act 1997, section 6-10 | Income Tax Assessment Act 1997, Division 20 | Income Tax Assessment Act 1997, Division 104 | Income Tax Assessment Act 1997, section 110-40 | Income Tax Assessment Act 1997, section 110-45 | Income Tax Assessment Act 193, section 160Z

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Tax treatment of conduct and compensation agreement payments. | Detailed Reasoning - Detailed reasoning: Section 6-5 ITAA 97 provides that the receipt of ordinary income is included in assessable income of the taxpayer. Ordinary income is defined to mean income according to ordinary concepts. It does not operate to include in a taxpayer's assessable income amounts of a capital nature. Whether a lump sum or other compensation payment constitutes assessable income in the hands of the recipient depends on whether it is a receipt of a capital or income nature which in turn depends upon a consideration of all the circumstances surrounding the payment. It is the character of the receipt in the hands of the recipient that must be determined. For income tax purposes, a compensation amount generally bears the character of that which it intends to replace. The starting point in determining the nature of the receipts is to characterise them as either income or capital. Characterising amounts as income or capital is important in determining the correct tax treatment. In Scott v FCT (1966) 117 CLR 514, Windeyer J stated: 'Whether or not a particular receipt is income depends upon its quality in the hands of the recipient'. Therefore, whether amounts are income or capital will depend upon what it is that the amount is replacing in your hands. From the perspective of the landholder, you view the payments under the CCAs as capital in nature as they represent compensation for the diminution in value of your property from the direct and indirect impacts of the XXXX activity on their land. Of course it is necessary to undertake a full consideration of all the circumstances surrounding the receipt. As the High Court stated in G P International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 at CLR 138; ATR 7; ATC 4420: 'To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character if 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 the transaction, venture or business'. This extract from the GP International Pipecoater's case contains within it a sense that the recipient of the amount took some action to generate the receipt. For example, it uses the following phrase " the character if a right or thing disposed of in exchange for the receipt". The use of the term "disposed of" or "in exchange for the receipt" bring with them the connotation that the recipient took an active part in the transaction that resulted in a receipt. The landholders, in this case, like all landholders who are compensated under the petroleum legislation do not dispose of or exchange anything because the nature of the conduct and compensation agreement is that they have no rights other than the right to receive appropriate compensation for the compensatable effects under the petroleum legislation. It is evident that the actual length of the agreements is in some respects uncertain as it will depend on the period of time that XXXX and XXXX carry on activities on the land. Accordingly, the actual quantum of compensation received over the life of the agreements will be dependent on the duration of the activities. In this context, it is worth recognising that the prospective compensation amounts shown in the CCA are merely a forecast of the absolute maximum that could be received under the CCA and receipts will only be received for the term of the agreement. In the context of classifying regular payments in a mining environment it is worthwhile reviewing the decision in Cape Flattery Silica Mines Pty Limited v FC of T 97 ATC 4552 (Cape Flattery's Case) where the issue of characterisation of payments as capital or income was undertaken to determine if the payments were deductible. The taxpayer in the Cape Flattery Case carried on a business of mining silica sands at Cape Flattery in North Queensland. The taxpayer initially held four mining leases for mineral sands, each of which covered land within the Hope Vale Aboriginal Reserve at Cape Flattery. Under these leases, the taxpayer was required to pay 3% of its annual net profit each year to the Department of Community Services for the benefit of the Aboriginals living at the Hope Vale Reserve. In 1990, the taxpayer applied for the grant of a new lease and also sought to renew an existing lease. The Hope Vale Aboriginal Council (HVAC), an incorporated body that represented the Aboriginals at Hope Vale Reserve, initially opposed the taxpayer's applications. However, following litigation between the taxpayer and HVAC, deeds were entered into between the parties which, among other things, provided that: (i) HVAC would consent to the grant of the new lease and cease its court proceedings challenging the renewal of a lease; (ii) the taxpayer would surrender a lease and withdraw an application for the renewal of another; (iii) the taxpayer would continue to pay 3% of its annual pre-tax profit under two leases to the Department of Community Services; and (iv) the taxpayer would pay to HVAC a total of 3% of its gross sales proceeds attributable to three continuing leases. In the Cape Flattery Case the sand was owned by the Crown; and the land, apart from the sand, was owned by HVAC and to undertake the sand mining activity the taxpayer required access to all of the land. The first point of distinction between the Cape Flattery Case and the landholder in this private ruling request is the fact that the Cape Flattery Case applied the general deduction provisions in s 51(1) ITAA36 whereas this private ruling request is reviewing the compensation from the perspective of the recipient to determine whether an amount it is of a capital or income in nature. It is acknowledged that the satisfaction of s 51(1) ITAA 36 depends on the payment of regular amounts that do not give rise to an enduring benefit for the taxpayer incurring the expenses and as stated in the Cape Flattery Case at paragraph 4561 and 4562: The principles underlying s 51(1) have been the subject of much exposition. It is sufficient for present purposes to refer first to the observations of Dixon J (as he then was) in Hallstroms Pty Ltd v FC of T (1946) 8 ATD 190; (1946) 72 CLR 634, where his Honour at ATD 194; CLR 647 referred to: '... the general consideration that the contrast between the two forms of expenditure [ie., on capital account and on revenue account] corresponds to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organization and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it.' In Associated Newspapers Ltd v FC of T (1938) 5 ATD 87; (1938) 61 CLR 337 , Dixon J said at ATD 93-94; CLR 359: 'The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss.' His Honour continued at ATD 95; CLR 361: 'In the attempt, by no means successful, to find some test or standard by the application of which expenditure or outgoings may be referred to capital account or to revenue account the Courts have relied to some extent upon the difference between an outlay which is recurrent, repeated or continual and that which is final or made 'once for all', and to a still greater extent upon a distinction to be discovered in the nature of the asset or advantage obtained by the outlay. If what is commonly understood as a fixed capital asset is acquired the question answers itself.' His Honour at ATD 96; CLR 363 made the statement so often later cited : 'There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.' It is evident from the above extracts that an expense may be of a revenue nature if it relates to the working capital used in the business rather than the acquisition of a business structure or part of a business structure. Land in the hands of the landholder, in this private ruling request, is a capital asset that is not held for the purpose of sale and so is not a revenue asset (not trading stock, while the silica sand mined by Cape Flattery was trading stock). The land is classified by the landholder as their income earning structure which when acquired did not give rise to a deduction for its cost but an inclusion of the related costs in the cost base of the land. In other words, amounts received to compensate the landholders for the permanent damage done to their capital asset (income earning structure) should be considered to be on capital account and result in a reduction in the cost base of the land. The receipt of compensation in the context of this private ruling request could never be considered to be part of the ordinary operations of the landholder in using their asset to generate assessable income. The second point of distinction between the Cape Flattery Case is that the agreement in that case related to a vast acreage or expanse of land whereas the CCAs apply to a defined area of land that is permanently damaged. The court in Cape Flattery noted that there was no permanent damage to the subject land whereas there is clear evidence of significant permanent damage and reduction in productive capacity and value in the land owned by you (the landholder). Another difference is the fact that the compensation is calculated with reference to a percentage of profit whereas the compensation in the CCAs is calculated with reference to the permanent damage and diminution in the value of the land caused by the CSG activities on the land. In Cape Flattery the taxpayer took possession of the whole surface of the land and so a characterisation of rental was sustained (for deductibility purposes) whereas the XXXX CCA focuses on direct damage to land and associated business assets. Further discussion of this issue can be identified in the case of Nullaga Pastoral Co Pty Ltd v Federal Commissioner of Taxation 78 ATC 4329, where the taxpayer owned a farming property which two other companies, as joint venturers, wished to explore for bauxite. The proposed activities of the joint venturers would considerably interfere with farm planning, operation and development. The parties negotiated an agreement whereby the joint venturers were granted exploration rights for five years and, as consideration for those rights, the taxpayer was to receive $10,000 annually. Wickham J said that the agreement had hardly any of the characteristics of a lease and that in his opinion the amounts were paid and received as consideration for the deprivation of part of the capital asset and in order to replace that capital. Again, in the case of Barrett v Federal Commissioner of Taxation (1968) 118 CLR 666; (1968) 15 ATD 149; (1968) 10 AITR 685 a licence to win minerals was granted to a third party on land owned by the taxpayer. The taxpayer and the third party executed a deed which detailed the amounts the taxpayer was to receive on account of damage to and diminution in the value of the land and other loss and inconvenience associated with the operations and activities of the third party. As it was difficult to ascertain the extent of the damage and diminution at the time the deed was entered into, the amounts to be paid were genuine pre-estimates. The taxpayer, in Barrett's case, did not include these amounts in his assessable income. The taxpayer contended that the amounts were capital in nature as they were made to compensate him for any damage to his land or diminution in the value of his land that might and probably would result from the mining operations. The Commissioner included these amounts in assessable income on the basis they were made either in respect of a licence granted to the third party to enter the taxpayer's property and conduct mining operations or because they were royalties. The High Court held that the payments were not royalties as the minerals were the property of the third party. The High Court further held that the payments were not made in return for the grant of a licence to use the taxpayer's land as the reservation of minerals gave the right to take the minerals from the land and do all things necessary for that purpose. The payments were made and received for the purpose of making good the estimated diminution in the value of the land and the amount of damage which might result from the carrying on of mining operations as detailed in the deed. Therefore, the payments were not assessable to the taxpayer. This is similar to the CSG activity carried on the subject land given that XXXX and XXXX owns or has the right to produce that gas and not you as the landholder. A direct correlation between the nature of the compensation payments received in Barrett's case and this case can be seen in that payments under the CCA are to make good the estimated diminution in value as agricultural land from the CSG activities on the land. For an amount to be income it has to be considered from the perspective of the recipient and in this case the characterisation that was agreed to by the landholder in the CCA was to compensate them for the permanent damage to and diminution in the value to the land. The fact that some of the compensation payments are to be received annually rather than by means of a single lump sum does not disturb the capital nature of the receipts because once the character of the payments is established the manner in which the payment is received does not (and should not) change the fundamental nature of the receipt. See Whitaker v FC of T 98 ATC 4285 (receipt for damage was considered to be capital). In summary, there is insufficient support for a finding that any of the amounts received under the CCAs is in the nature of income and so it is concluded that all amounts received under all CCAs are capital in nature. Having concluded that the amounts are capital in nature and have been calculated with reference to the permanent damage and diminution in value of the underlying asset it is appropriate that a consideration of Taxation Ruling TR 95/35 is undertaken. Taxation Ruling TR 95/3510 takes a look-through approach where it seeks to connect the relevant compensation to the most relevant impacted asset and the ruling provides the following explanation of the look through approach: ' The look-through approach is the process of identifying the most relevant asset. It requires an analysis of all of the possible assets of the taxpayer in order to determine the asset to which the compensation amount is most directly related. It is also referred to in this Ruling as the underlying asset approach.' This Ruling applies to a person who receives an amount as compensation. It considers the capital gains tax ('CGT') consequences for the recipient of the amount, and whether the amount should be included in the assessable income of the recipient under Part IIIA of the Income Tax Assessment Act 1936 ('the Act'). The ruling clarifies the concept of underlying asset as: '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 underlying 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 determining which the most relevant underlying asset is, Taxation Ruling TR 95/35 at paragraph 70 provides: '...it is often appropriate to adopt a "look-though" approach to the transaction or arrangement which generates the compensation receipt. We regard this concept as the most appropriate basis on which to determine whether any capital gain arises on the disposal of any asset of the taxpayer.' The taxpayer must, as specified in paragraph 82 of Taxation Ruling TR 95/35, be able to " show that the compensation receipt has a direct and substantial link with the underlying asset ". The right to seek compensation in the context of coal seam gas (CSG) activity on land is modified by the requirements of the Petroleum and Gas (Production and Safety) Act 2004 (Qld) (Petroleum legislation). The compensation has been based on the concept of compensatable effect which is defined in the Petroleum legislation. The focus of the legislation is to compensate the landholder for activities which are carried out by the authority holder, that is X in the current circumstances and cause damage to the landholder's land and potentially any business carried on, on that land. In particular, the compensation relates to: (a) the deprivation of possession of the land's surface and of course if possession of the productive surface of the land is denied then no productive use could be made of the land by the landholders and the value of the land for agricultural purposes will be reduced to zero; (b) the diminution in the value of the land and in this context it is expected that this would include the diminution in the ability of the land in its capacity as agricultural land to produce crops or livestock as a result of CSG activity on the land; (c) even if the possession of the surface of the land is not denied there can be diminution in the use that can be made of the land in the short or long term due to the degradation of the soil resulting from the various activities carried out in the course of developing the gas fields and related infrastructure; (d) the severance of parts of the land from other parts of the landholder's property and in this respect it would cover situations where parts of the overall property are stranded (for example, separated by roads, etc) and rendered unproductive due to isolation from the rest of the property and the physical impacts on the land; and (e) any other cost, damage or loss that is likely to arise as a result of carrying out activities on the land and in this context there may be permanent damage or loss to the productive capacity of the land because there may be restrictions on the crop and livestock enterprise options that can be carried on the land due to the presence of the CSG activity on the property. The intention of the parties in entering into the CCA as set out in the objectives is to " ensure that landholder is properly compensated as required under the Petroleum Legislation". The compensatable effects under the Petroleum legislation focus on the permanent damage to and loss of market value of the "eligible claimant's land". The loss does not extend to matters such as the mere temporary loss of income but to the permanent damage to the land. Any loss of income if it were to occur from events such as damage to a growing crop would be separately accounted for as 'compensation for loss of crop' payable to the landholder or to the tenant/occupier. Fundamental to the operation of Taxation Ruling TR 95/35 is that the damage caused should be permanent and the ruling explains the concept of "permanent damage" as follows: '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 by the taxpayer to put it right.' It is recognised that at some distant point in the future that rehabilitation of the land may occur but given the quantum of gas resource that is under the subject land rehabilitation is a remote event. The definition of permanent damage in Taxation Ruling TR 95/35 recognises that rehabilitation may occur and so the presence of permanent damage is not inconsistent with the expectation that some action may be taken or could be taken in the future to reduce the damage. In other words, the expected rehabilitation of the land in the future does not disturb the fact that there is permanent damage and diminution in the value of the land today. It is noted, that while XXXX has responsibility under the CCA's to perform rehabilitation work it is likely that at least some of the permanent diminution in the productive capacity of the land may not be able to be reversed. Furthermore, the definition of permanent damage in Taxation Ruling TR 95/35 focuses on permanent damage and reduction in value and in the context of the land impacted by the CSG activity agricultural land will be permanently damaged if it cannot be used as agricultural land or if it can be used as agricultural land there is a permanent reduction in the ability of the land to produce crops of a particular quality and yield or sustain livestock at the same carrying capacity (stocking rate) and nourish them adequately. This will result in the permanent reduction in the value of the land for agricultural purposes. The foregoing analysis provides that there is a very close alignment between the concept of permanent damage in the context of Taxation Ruling TR 95/35 and the compensatable effects in the Petroleum legislation. In summary, to be able to demonstrate that a particular amount of compensation relates to permanent damage to an underlying asset it is necessary to identify a particular amount or be able to reasonably estimate an amount that has been allocated to a particular underlying asset that has been permanently damaged. It is submitted that the payments for activities under all of the CCAs are clearly identified and relate wholly to the permanent damage to the land and/or diminution in value of the land and do not represent any amount in the nature of income to the landholder. Please refer to the table in "Schedule 2 - Activities" in the agreement for a full break down of the related impacts on the land. In your circumstances, the amounts received from activities covered by the CCAs do not have the character of ordinary income in the hands of the landholder and are more correctly classified as capital receipts. In accordance with the look through approach in Taxation Ruling TR 95/35 it is evident that the most relevant asset to which the compensation relates in this instance is the underlying asset that is, the land. It is the land which suffers permanent damage or has been permanently reduced in value as a result of the activities undertaken. In accordance with subsection 110-40(3)of ITAA 97 as supported by Taxation Ruling TR 95/35, the compensation payments made in relation to such activities is not assessable capital gains but reduce the cost base of the underlying land. In this respect the compensation received should be applied to reduce the cost base of the relevant properties and should not be included in the assessable income of the landholder. | Detailed Reasoning - Liability to GST: Where a business receives compensation the question to address is whether this receipt gives rise to a GST liability to a business that is registered for GST. With respect to GST we must first determine if the business has made a supply in connection with receiving the compensation. The landholder has become entitled under the state mining legislation to receive compensation for certain kinds of loss caused by XXXX upon entry to their land. The relevant section of the state mining legislation provides that the owner of any land upon which mining operations are carried out is entitled to receive compensation for any economic loss, hardship and inconvenience suffered by the landholder as a consequence of mining operations. In determining the compensation payable under the mining legislation, regard is made to a number of matters including any damage caused to the land by the mining operator. The amount of the compensation is an amount determined by agreement between the landholder and the mining operator under conduct and compensation agreement. The quantum of compensation payable is not dependent on a landholder's time and effort in being a party to any agreement. For a supply to be subject to GST, the supply must be a taxable supply. Section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that you make a taxable supply if: (a) you make a supply for consideration; and (b) the supply is made in the course or furtherance of an enterprise that you carry on; and (c) the supply is connected with Australia; and (d) you are registered or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.' (as defined in section 195-1 of the GST Act) The meaning of 'supply' is defined in subsection 9-10(1) of the GST Act as any form of supply whatsoever. Subsection 9-10(2) of the GST Act then provides a non-exhaustive list of types of supplies and includes a grant, assignment or surrender of real property. Therefore, to be a taxable supply, the landholder must make a 'supply for consideration' under paragraph 9-5(a) of the GST Act. Goods and Services Tax Ruling GSTR 2001/4 deals with the GST consequences of court orders and out of court settlements and discusses the meaning of 'supply'. Paragraph 22 of the ruling provides that a supply is essentially 'something which passes from one entity to another'. Paragraph 25 of GSTR 2001/4 further states that ' subsection 9-10(2) refers to two aspects of a supply; the thing which passes, such as goods, services, a right or obligation; and the means by which it passes, such as its provision, creation, grant, assignment, surrender or release.' Therefore, the term 'supply' includes the action by which the thing passes from one entity to another. The word 'make' in the phrase 'you make the supply' in paragraph 9-5(a) of the GST Act, there is a requirement for a supplier to take some action to cause a supply to be made. The landholder needed to take some action or do something for a supply to occur. The key issue is whether the landholder makes any supply when they receive compensation. Normally the transfer or surrender of the legal interest in land is covered by the definition of supply in s 9-10 GST Act. Landholders can transfer or surrender their rights in land that they own, but in the case of mining rights, the landholders do not transfer or surrender their rights related to mining on the land to the mining companies because the mining companies are already the holder of these rights as they were vested in the mining company upon the grant of the statutory authority by the State Government. In this case, it is clear that the landholder is not providing a right in relation to the land. The compensation payment received by the landholder is in respect of compensation for any damages caused or likely to be caused to their land and any inconvenience suffered by the landholder as a consequence of the activities carried out by the mining company on their land. Goods and Services Tax Ruling GSTR 2001/4 states, in relation to compensation and damages, at paragraph 73: 'The most common form of remedy is a claim for damages arising out of the termination or breach of a contract or for some wrong or injury suffered. This damage, loss or injury, being the substance of the dispute, cannot in itself be characterised as a supply made by the aggrieved party. This is because the damage, loss or injury in itself does not constitute a supply under section 9-10 of the GST Act.' In essence, the landholder is not making a supply and so the landholder cannot make a taxable supply on which they would have a GST liability. This is not to say that landholder does not undertake anything because they generally upon receipt of the compensation confirm that the mining company does not have any further requirement to pay a further compensation amount for the damages set out in the CCA. In other words, they give up their rights to pursue further compensation in relation to the impacts set out in Schedule 2 to the CCA. This raises the issue of whether giving up of a landholder's rights would be a separate supply or as termed in Goods and Services Tax Ruling GSTR 2001/4 a 'discontinuance supplies'. Paragraphs 106 to 109 in GSTR 2001/4 discuss discontinuance supplies as follows: 106. Where the only supply in relation to an out-of-court settlement is a 'discontinuance' supply, it will typically be because the subject of the dispute is a damages claim. In such a case, the payment under the settlement would be in respect of that claim and not have a sufficient nexus with the discontinuance supply. 107. In most instances, a 'discontinuance' supply will not have a separately ascribed value and will merely be an inherent part of the legal machinery to add finality to a dispute which does not give rise to additional payment in its own right. They are in the nature of a term or condition of the settlement, rather than being the subject of the settlement. 108. We do not consider that the inclusion of a 'no liability' clause in a settlement deed alters this position. 'No liability' clauses are commonly included in settlement agreements and we do not consider their inclusion to alter the substance of the dispute, or the reason payment is made. 109. We consider that a payment made under a settlement deed may have a nexus with a discontinuance supply only if there is overwhelming evidence that the claim which is the subject of the dispute is so lacking in substance that the payment could only have been made for the discontinuance supply. If we apply this extract to the receipts by the landholder in accordance with the CCA, then the undertaking made by landholder not to seek further compensation for the activities in Schedule 2 being as it is a subordinate aspect of the settlement, without its own consideration, will not be a supply and consequently not a taxable supply. As the compensation relates to damages then reference to paragraphs 110 and 111 of GSTR 2001/4 is relevant: 110. With a dispute over a damages claim, the subject of the dispute does not constitute a supply made by the aggrieved party... 111. If a payment is made under an out-of-court settlement to resolve a damages claim and there is no earlier or current supply, the payment will be treated as payment of the damages claim and will not be consideration for a supply at all, regardless of whether there is an identifiable discontinuance supply under the settlement. In other words, in relation to the landholders as there is no 'earlier or current supply' that is related to the payment of compensation then the damages claim does not give rise to any supply. Notwithstanding that the landholders' acceptance of the terms contained in the compensation agreement may amount to supplies within the meaning of paragraphs 9-10(2)(e) or 9-10(2)(g) GST Act, no part of the amount paid as compensation is consideration for these supplies. The subject of the dispute, being the settlement of damages claims between the parties in relation to the activities conducted on the land, is not lacking in substance and is what the compensation is paid for. In your circumstances, the compensation received relates to damages suffered by you as the landholder as a result of activities carried out by the mining company on the land and is not a consideration for a supply and accordingly no taxable supply has been made by you, the landholder. In addition, as no part of the compensation is attributable to discontinuance supplies, there are no GST consequences for the discontinuance supplies.

Question 2: To the extent that the compensation receipts, received under the Conduct and Compensation Agreements (CCAs) from XXXX and XXXX, do not constitute assessable income in accordance with s 6-5 ITAA97, will the receipt of these amounts constitute capital proceeds under Division 116 ITAA97 in respect of a CGT event happening? | Question 3: To the extent that the compensation receipts do not constitute assessable income in accordance with s 6-5 ITAA97 and are not capital proceeds under Division 116 ITAA97 in respect of a CGT event happening; do the compensation amounts to the extent that they represent compensation for permanent damage to land, reduce the cost base of the properties under s 110-40 and s 110-45 ITAA 97? | Question 4: Will the landholder incur a GST liability on the receipt of compensation amounts? | Reasons for Decision: These reasons for decision accompany the notice of private ruling for XXXX.