Private ruling: Treatment of mining compensation payments
Published: January 2013
Ruling period: The income years ended 30 June 2009 and 30 June 2010 | Question 2 | Are the payments for compensation received under Agreement A capital proceeds under Division 116 of the ITAA 1997 in respect of a CGT event happening? | Answer | Yes | This ruling applies for the following periods: | The income years ended 30 June 2009 and 30 June 2010 | Question 3 | Does any compensation received under Agreement A reduce the existing cost base of the Property, or prevent anticipated expenditure from forming part of the cost base of the Property, under section 110-45 of the ITAA 1997, and to the extent that it does, is it non-assessable under section 102-5 of the ITAA 1997? | Answer | No, the compensation received under Agreement A is not a recoupment of the cost base of the Property under section 110-45 of the ITAA 1997. | This ruling applies for the following periods: | The income years ended 30 June 2009 and 30 June 2010 | Question 4 | If the compensation received under Agreement A is a recoupment under subsection 110-45(3) of the ITAA 1997 and exceeds the cost base of the Property, is the excess compensation non-assessable under section 6-5 or otherwise under Parts 3-1 and 3-3 of the ITAA 1997? | Answer | Given the compensation received under Agreement A is not a recoupment under subsection 110-45(3) of the ITAA 1997 this question is not applicable. | Issue 2 | Question 5 | Are the payments for compensation received under Agreement B assessable as income under section 6-5 of the ITAA 1997? | Answer | Yes, in part | This ruling applies for the following periods: | The income years ended 30 June 2011 and 30 June 2012 | Question 6 | Are the payments for compensation received under Agreement B capital proceeds under Division 116 of the ITAA 1997 in respect of a CGT event happening? | Answer | Yes | This ruling applies for the following periods: | The income years ended 30 June 2011 and 30 June 2012 | Question 7 | Does any compensation received under Agreement B reduce the existing cost base of the Property, or prevent anticipated expenditure from forming part of the cost base of the Property, under section 110-45 of the ITAA 1997, and to the extent that it does, is it non-assessable under section 102-5 of the ITAA 1997? | Answer | No, the compensation received under Agreement B is not a recoupment of the cost base of the Property under section 110-45 of the ITAA 1997. | This ruling applies for the following periods: | The income years ended 30 June 2011 and 30 June 2012 | Question 8 | If the compensation received under Agreement B is a recoupment under subsection 110-45(3) of the ITAA 1997 and exceeds the cost base of the Property, is the excess compensation non-assessable under section 6-5 or otherwise under Parts 3-1 and 3-3 of the ITAA 1997? | Answer | Given the compensation received under Agreement B is not a recoupment under subsection 110-45(3) of the ITAA 1997 this question is not applicable. | The scheme commenced during the income year ended 30 June 2009.

Ruling: Q1: Are the payments for compensation received under Agreement A assessable as income under section 6-5 of the ITAA 1997? | A1: Yes, in part


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-5(1) | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Subsection 20-25(1) | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Subsection 104-25(1) | Income Tax Assessment Act 1997 Subsection 104-25(3) | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Subsection 110-25(5) | Income Tax Assessment Act 1997 Subsection 110-45(3) | Income Tax Assessment Act 1997 Division 116 | Income Tax Assessment Act 1997 Subsection 116-20(1)

Reasons for decision: Summary: A number of the payments for compensation received under Agreement A are assessable as income under section 6-5 of ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under section 6-5 of the ITAA 1997 your assessable income includes income according to ordinary concepts. This income is called 'ordinary income'. There is no definition of 'ordinary income' in the tax law. The courts however have established the following principles to determine if an amount is ordinary income: i) it must be determined in accordance with ordinary concepts and usages, except where statute provides otherwise; ii) it depends on a close examination of all relevant circumstances; and iii) it is an objective test No one factor is decisive and each situation must be examined to determine if the particular payment can be characterised as income according to ordinary concepts. Periodicity or regularity of payment is a common characteristic of income receipts, even where the receipts are not directly referrable to employment or services rendered ( Commissioner of Taxation v. Citibank (1993) 44 FCR 434; 93 ATC 4691;(1993) 26 ATR 557 ). Capital gains are not ordinary income in the hands of the recipient however they may still be assessable statutory income under the ITAA 1997. In G.P. International Pipecoaters Pty. Ltd. v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 the High Court stated that: To determine whether a receipt is of an income or 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 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 character of the receipt in the hands of the recipient must be determined. It is in this context that the character of the payment is determined. If the payments are periodical, the question becomes, are the payments instalments of the capital amount or really in the nature of income. The case Barrett v Federal Commissioner of Taxation (1968) 118 CLR 666; (1968) 15 ATD 149; (1968) 10 AITR 685 concluded the periodic nature of the compensation payments did not convert them into a revenue amount. Barrett was the owner of a farming property under which lay deposits of soapstone. The right to mine soapstone was exercised on Barrett's land. Barrett received an amount of money to compensate for damage to and loss of value to the land and inconvenience to Barrett. Mining operations were carried out on the land for a number of years, and the mining company paid the taxpayer by monthly instalments an amount calculated based on the amount of soap stone removed from the land during the year. The High Court ruled the payments were made and received for the purpose of making good the estimated diminution in value of the land and the amount of damage to it resulting from the carrying on of mining operations, and were therefore of a capital nature. Taxation Determination TD 93/58 considers under what circumstances the receipt of a lump sum compensation/settlement payment is assessable. Guidance provided by TD 93/58 indicates that a compensation amount will be assessable: (a) if the payment is compensation for loss of income only e.g. past year profits, and/or interest; or (b) to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature. Pursuant to Agreement A, the Taxpayers are entitled to the following compensation: 1. A one-off lump sum payment; plus 2. A one-off payment per kilometre of seismic line, including repair of damage caused to existing infrastructure and full rehabilitation of the line and impacted areas; plus 3. In the event that any crop planted prior to commencement of the Activities is lost due to the conduct of the Activities, compensation shall by payable at the specified rate of crop Market Value per kilometre; plus 4. For each crop area described above, a payment for reduced yield in the following crop season at the specified rate of crop Market Value. To determine whether any of the payments are direct compensation for loss of income, or identifiable and quantifiable as income it is necessary to consider the activities for which the compensation is being paid. 1. A one-off lump sum payment In the current circumstances, based on the information provided, it is not possible to identify what portion of this amount is compensation for the loss of income or directly identifiable or quantifiable as income. Therefore, the one-off lump sum payment is not assessable as ordinary income under section 6-5 of the ITAA 1997. 2. Seismic Line A one-off payment per kilometre of seismic line is to be paid. In addition, Entity B is required to undertake rehabilitation of the area back to a standard similar to that which existed prior to the commencement of the activities. The compensation payments in respect of the installation of seismic line may be considered to be rental income or compensation for loss of primary production income. However, given that the Agreement outlines the rehabilitation requirements associated with the Activities, the payment has a capital component and therefore is not solely for loss of income or directly identifiable or quantifiable as income. As such it is considered the amount per kilometre for seismic line is not assessable under section 6-5 of the ITAA 1997. 3. Crops planted prior to commencement of the Activities Compensation received in respect of the loss of crops relates directly to the loss of income as a result of the impact the mining activities have on farming operations. Therefore, the compensation received for the loss of crops is assessable income under section 6-5 of the ITAA 1997. 4. Reduced yield in the subsequent crop season Compensation received in respect of reduced crop yields in the following crop season relates directly to the loss of income as a result of the impact the mining activities have on farming operations. Therefore, compensation received for reduced crop yield is assessable income under section 6-5 of the ITAA 1997. | Summary: The payments for compensation received under Agreement A constitute capital proceeds under Division 116 of the ITAA 1997 in respect of CGT event C2 (section 104-25 of the ITAA 1997) happening. | Detailed Reasoning - Detailed reasoning: CGT event C2 (section 104-25 of the ITAA 1997) happens where a taxpayer's ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option being exercised; or (f) if the asset is a convertible interest being converted. In the current circumstances, the Taxpayers, upon entering into Agreement A obtained various rights, including the right to be compensated for the specified Activities. These rights are an intangible CGT asset. Pursuant to Agreement A, the Taxpayers are entitled to the following compensation: 1. A one-off lump sum payment; plus 2. A one-off payment per kilometre of seismic line, including repair of damage caused to existing infrastructure and full rehabilitation of the line and impacted areas; plus 3. In the event that any crop planted prior to commencement of the Activities is lost due to the conduct of the Activities, compensation shall by payable at the specified rate of crop Market Value per kilometre; plus 4. For each crop area described above, a payment for reduced yield in the following crop season at the specified rate of crop Market Value. In this case, each right to receive compensation in relation to the Activities was satisfied when Entity B paid the compensation to the Taxpayers. It is considered that CGT event C2 occurred at the time that each right was satisfied. A capital gain from CGT event C2 will arise if the capital proceeds from the ending are more than the right's cost base: subsection 104-25(3) of the ITAA 1997. Subsection 116-20(1) of the ITAA 1997 defines capital proceeds from a CGT event as: (a) the money you have received, or are entitled to receive, in respect of the event happening; and (b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event). Taxation Ruling TR 95/35 considers the CGT consequences for a taxpayer who has received a compensation payment and specifically looks at whether the amount should be included in the assessable income of the recipient under the former Part IIIA of the ITAA 1936. TR 95/35 addresses the issue of identifying the relevant CGT asset by applying the 'look-through' approach. The look-through approach requires an analysis of all of the possible assets of the taxpayer in order to determine the asset to which the compensation is most directly related. In TR 95/35 the following assets are considered as CGT assets in respect of which compensation received may be attributed: · an underlying asset; · a right to seek compensation; or · a notional asset. However, in the current circumstances, it is considered that the compensation received potentially relates to either: 1) the underlying asset (the Property); or 2) the right to receive compensation provided by Agreement A. | Detailed Reasoning - A one-off lump sum payment: When considering the CGT implications of the lump sum payment, TR 95/35 defines an undissected lump sum compensation receipt as any amount of compensation received by the taxpayer where the components of the receipt have not been and cannot be determined or otherwise valued or reasonably estimated. TR 95/35 at paragraph 18 provides that 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. In the current circumstances, it cannot be said that the lump sum payment is wholly attributable to the underlying asset (and the permanent damage to, or a permanent reduction in value of the Property). In light of this, it is considered that the lump sum compensation payment is capital proceeds from CGT event C2 happening when the right to be compensated for the specified Activities as per Agreement A was satisfied. | Detailed Reasoning - A one-off payment per kilometre of seismic line: TR 95/35 states if the amount of compensation is not received wholly in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. In the current circumstances, based on the information provided, it cannot be said that the compensation received in respect of the installation of a seismic line is wholly attributable to the underlying asset (and the permanent damage to, or a permanent reduction in value of the Property). An income element to the payments exists in that the receipts could comprise rental income for use of the land, or considered compensation for the loss of primary production income. Although, where such components cannot be distinguished, the rationale of the cases McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381 and Allsop v Federal Commissioner of Taxation (1965) 113 CLR 341 suggests that the whole amount will be regarded as capital in nature. On this basis, it is considered that the one-off payment per kilometre of seismic line is capital proceeds from CGT event C2 happening when this right to be compensated for the specified Activities as per Agreement A was satisfied. | Detailed Reasoning - Crop compensation: Any compensation received in relation to the loss of crops planted prior to the commencement of the Activities and/or the reduced yield in the subsequent crop season is also considered to be capital proceeds from CGT event C2 happening when these rights to be compensated for the specified Activities as per Agreement A was satisfied. It is noted however that any capital gain made is reduced by any amount included in assessable income under another provision of the ITAA 1997 or the ITAA 1936 as a result of the CGT event: section 118-20 of the ITAA 1997. As previously determined in question 1, the compensation received in relation to the loss of crops planted prior to the commencement of the Activities and the reduced yield in the subsequent crop season is assessable income under section 6-5 of the ITAA 1997 as ordinary income and therefore any capital gain made from the CGT events will be reduced under section 118-20 of the ITAA 1997. | Summary: The compensation received under Agreement A will not reduce the cost base of the Property under subsection 110-45(3) of the ITAA 1997. Subsection 110-45(3) of the ITAA 1997 will not prevent anticipated expenditure (future rehabilitation expenditure) forming part of the cost base of the Property. | Detailed Reasoning - Detailed reasoning: Subsection 110-45(3) of the ITAA 1997 states that expenditure does not form part of any element of the 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. Recoupment of a loss or outgoing is defined in subsection 20-25(1) of the ITAA 1997 as: (a) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and (b) a grant in respect of the loss or outgoing. | Detailed Reasoning - A one-off lump sum payment and payment per kilometre of seismic line: As previously noted, in the current circumstances, based on the information provided, it cannot be said that the compensation received in respect of the lump sum payment and installation of a seismic line is wholly attributable to the underlying asset (and the permanent damage to, or a permanent reduction in value of the Property) such that it would represent a recoupment of all, or part of, the total acquisition costs of the asset (the first cost base element). Subsection 110-25(5) of the ITAA 1997 defines the fourth element of the cost base as capital expenditure you incurred: (a) the purpose or the expected effect of which is to increase or preserve the asset's value; or (b) that relates to installing or moving the asset. It is likely that anticipated expenditure incurred by the Taxpayers to rehabilitate the land as a result of the Activities outlined in Agreement A would fall within the fourth element of cost base. Based on the information provided, it also cannot be said that the lump sum and/or the compensation received in respect of the installation of a seismic line is wholly attributable to the anticipated expenditure required to rectify the permanent damage to the underlying asset. Therefore the payment of this portion of the compensation does not result in a direct recoupment of these anticipated costs that may form part of the fourth element of the cost base of the Property. As a result, this portion of the compensation received under Agreement A will not reduce the cost base of the Property under subsection 110-45(3) of the ITAA 1997 or prevent anticipated expenditure (future rehabilitation expenditure) forming part of the cost base of the Property. | Detailed Reasoning - Crop Compensation: These payments seek to compensate the Taxpayers for loss of income relating to their business activities and not expenditure which forms part of the cost base of the Property. It is therefore considered that this portion of the compensation received under Agreement A will not reduce the existing cost base of the Property or prevent anticipated expenditure forming part of the cost base of the Property under section 110-45 of the ITAA 1997. | Summary: Given the compensation received under Agreement A is not a recoupment under subsection 110-45(3) of the ITAA 1997 this question is not applicable. | Summary: A number of the payments for compensation received under Agreement B are assessable as income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under section 6-5 of the ITAA 1997 your assessable income includes income according to ordinary concepts. This income is called 'ordinary income'. There is no definition of 'ordinary income' in the tax law. The courts however have established the following principles to determine if an amount is ordinary income: i) it must be determined in accordance with ordinary concepts and usages, except where statute provides otherwise; ii) it depends on a close examination of all relevant circumstances; and iii) it is an objective test. No one factor is decisive and each situation must be examined to determine if the particular payment can be characterised as income according to ordinary concepts. Periodicity or regularity of payment is a common characteristic of income receipts, even where the receipts are not directly referrable to employment or services rendered ( Commissioner of Taxation v. Citibank (1993) 44 FCR 434; 93 ATC 4691;(1993) 26 ATR 557 ). Capital gains are not ordinary income in the hands of the recipient however they may still be assessable statutory income under the ITAA 1997. In G.P. International Pipecoaters Pty. Ltd. v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 the High Court stated that: To determine whether a receipt is of an income or 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 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 character of the receipt in the hands of the recipient must be determined. It is in this context that the character of the payment is determined. If the payments are periodical, the question becomes, are the payments instalments of the capital amount or really in the nature of income. The case Barrett v Federal Commissioner of Taxation (1968) 118 CLR 666; (1968) 15 ATD 149; (1968) 10 AITR 685 concluded the periodic nature of the compensation payments did not convert them into a revenue amount. Barrett was the owner of a farming property under which lay deposits of soapstone. The right to mine soapstone was exercised on Barrett's land. Barrett received an amount of money to compensate for damage to and loss of value to the land and inconvenience to Barrett. Mining operations were carried out on the land for a number of years, and the mining company paid the taxpayer by monthly instalments an amount calculated based on the amount of soap stone removed from the land during the year. The High Court ruled the payments were made and received for the purpose of making good the estimated diminution in value of the land and the amount of damage to it resulting from the carrying on of mining operations, and were therefore of a capital nature. Taxation Determination TD 93/58 considers under what circumstances the receipt of a lump sum compensation/settlement payment is assessable. Guidance provided by TD 93/58 indicates that a compensation amount will be assessable: (a) if the payment is compensation for loss of income only e.g. past year profits, and/or interest; or (b) to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature. Pursuant to Agreement B, the following compensation is to be paid: 1. A percentage of the market value of the area of each wellsite plus a specified amount per well for drilling fees; 2. A specified amount per vent/drain; 3. A percentage of the market value of the area of access roads; 4. A percentage of the market value of the area of the gathering system; 5. A specified amount per hour for a specified number of hours per well per annum; 6. Agistment costs for disturbance; and 7. Professional costs. To determine whether any of the payments are direct compensation for loss of income, or identifiable and quantifiable as income it is necessary to consider the activities for which the compensation is being paid. Agreement B details the activities which are authorised to be undertaken by Entity B. 1. Well sites These activities involve the construction and ongoing operation of a number of well sites, including drilling, testing, ongoing access and subsequent rehabilitation of the drilling and well sites to a standard similar to that which existed prior to the commencement of the Activities. Furthermore, subsequent remedial workovers are to be undertaken at each well, and the plugging and abandonment of each well upon cessation of petroleum activities. The compensation payments in respect of the construction and operation of the wells may be considered to be rental income or compensation for loss of primary production income. However, given that Schedule 1 outlines the rehabilitation requirements associated with the Activities the payment has a capital component and therefore is not solely for loss of income or directly identifiable or quantifiable as income. In light of this, it is therefore considered that the compensation payments for the wellsites, drilling fees and resultant wells are not assessable under section 6-5 of the ITAA 1997. 2. Vents and drains This activity involves the installation of and ongoing access to high point vents and low point drains over the gathering system pipeline, including the removal of the vents and drains and the rehabilitation of the area back to a standard similar to that which existed prior to the commencement of the activities within 24 months of the completion of the Activities. The compensation payments in respect of the installation and access to vents and drains may be considered to be rental income or compensation for loss of primary production income. However, given that Schedule 1 outlines the rehabilitation requirements associated with the Activities the payment has a capital component and therefore is not solely for loss of income or directly identifiable or quantifiable as income. As such it is considered that the compensation payment for vents and drains is not assessable under section 6-5 of the ITAA 1997. 3. Access Roads This activity involves the construction, maintenance or modification of new access roads with a width of 10 metres. It is considered the compensation payment for access roads is assessable income under section 6-5 of the ITAA 1997. This receipt is either rental income, compensation for a loss of primary production income or both. 4. Gathering system This activity involves the installation, testing and operation of a gathering system pipeline from each of the wellsites, together with the subsequent rehabilitation of the lines. The compensation payments in respect of the gathering system may be considered to be rental income or compensation for loss of primary production income. However, given that Schedule 1 outlines the rehabilitation requirements associated with the Activities the payment has a capital component and therefore is not solely for loss of income or directly identifiable or quantifiable as income. On this basis, it is considered that the compensation payment for the gathering system is not assessable under section 6-5 of the ITAA 1997. 5. Agistments Costs Compensation received in respect of agistment costs relates directly to the loss of income as a result of the impact the mining operations have on farming operations. Therefore, the compensation linked to agistment costs for disturbance are assessable income under section 6-5 of the ITAA 1997. 6. Professional costs To the extent the professional costs were treated as a deduction under section 8-1 of the ITAA 1997 when incurred, the reimbursement should be brought to account as assessable income pursuant to section 6-5 of the ITAA 1997. To the extent the professional costs were capitalised when incurred, the reimbursement should be treated as recouped expenditure. Subsection 110-45(3) of the ITAA 1997 states expenditure does not form part of any element of the 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. | Detailed Reasoning - Conclusion: In conclusion, compensation received in respect of access roads and agistment costs are assessable as income under section 6-5 of the ITAA 1997. With the exception of professional costs, all other compensation payments made under Agreement B include a provision for rehabilitation (which is of a capital nature). This attribute indicates that these payments are not solely for loss of income or directly identifiable or quantifiable as income and as such these payments are not considered to be assessable as ordinary income under section 6-5 of the ITAA 1997. | Summary: Payments for compensation received under Agreement B constitute capital proceeds under Division 116 of the ITAA 1997 in respect of CGT event C2 (section 104-25 of the ITAA 1997) happening. | Detailed Reasoning - Detailed reasoning: CGT event C2 (section 104-25 of the ITAA 1997) happens where a taxpayer's ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option being exercised; or (f) if the asset is a convertible interest being converted. In the current circumstances, the Taxpayers, upon entering into Agreement B obtained various rights, including the right to be compensated for the specified Activities. These rights are an intangible CGT asset. Pursuant to Agreement B, the following compensation is to be paid: 1. A percentage of the market value of the area of each wellsite plus a specified amount per well for drilling fees; 2. A specified amount per vent/drain; 3. A percentage of the market value of the area of access roads; 4. A percentage of the market value of the area of the gathering system; 5. A specified amount per hour for a specified number of hours per well per annum; 6. Agistment costs for disturbance; and 7. Professional costs. In this case, each right to receive compensation in relation to the Activities was satisfied when Entity B paid the compensation to the Taxpayers. It is considered that CGT event C2 occurred at the time that each right was satisfied. A capital gain from CGT event C2 will arise if the capital proceeds from the ending are more than the right's cost base: subsection 104-25(3) of the ITAA 1997. Subsection 116-20(1) of the ITAA 1997 defines capital proceeds from a CGT event as: (a) the money you have received, or are entitled to receive, in respect of the event happening; and (b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event). Taxation Ruling TR 95/35 considers the CGT consequences for a taxpayer who has received a compensation payment and specifically looks at whether the amount should be included in the assessable income of the recipient under the former Part IIIA of the ITAA 1936. TR 95/35 addresses the issue of identifying the relevant CGT asset by applying the 'look-through' approach. The look-through approach requires an analysis of all of the possible assets of the taxpayer in order to determine the asset to which the compensation is most directly related. In TR 95/35 the following assets are considered as CGT assets in respect of which compensation received may be attributed: · an underlying asset; · a right to seek compensation; or · a notional asset. However, in the current circumstances, it is considered that the compensation received potentially relates to either: 1) the underlying asset (the Property); or 2) the right to receive compensation provided by Agreement B. | Detailed Reasoning - Wells and wellsites, vent and drains and gathering system: TR 95/35 states if the amount of compensation is not received wholly in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. In the case at hand, based on the information provided, compensation received in respect of Activities 1, 2, 4 and 5 cannot be said to have been received wholly in respect of permanent damage to, or a permanent reduction in value of the Property. An income element to the payments exists in that the receipts could comprise rental income for use of the land, or considered compensation for the loss of primary production income. However, where such components cannot be distinguished, the rationale of the cases McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381 and Allsop v Federal Commissioner of Taxation (1965) 113 CLR 341 suggests that the whole amount will be regarded as capital in nature. On this basis, it is considered that the compensation received in respect of Activities 1, 2, 4 and 5 is capital proceeds from CGT event C2 happening when the Taxpayers' rights to be compensated for the specified Activities as per Agreement B were satisfied. | Detailed Reasoning - Roads and agistment costs: Any compensation received in relation to the access roads and agistment costs is also considered to be capital proceeds from CGT event C2 happening when these rights to be compensated for the specified Activities as per Agreement B were satisfied. It is noted that any capital gain is reduced by any amount included in assessable income under another provision of the ITAA 1997 or the ITAA 1936 as a result of the CGT event: section 118-20 of the ITAA 1997. As previously determined in question 5, the compensation received in relation to the access roads and agistment costs is assessable income under section 6-5 of the ITAA 1997 as ordinary income and therefore any capital gain made from these CGT events happening will be reduced under section 118-20 of the ITAA 1997. | Summary: The compensation received under Agreement B will not reduce the cost base of the Property under subsection 110-45(3) of the ITAA 1997. Subsection 110-45(3) will not prevent anticipated expenditure (future rehabilitation expenditure) forming part of the cost base of the Property. | Detailed Reasoning - Detailed reasoning: Section 110-45(3) of the ITAA 1997 states that expenditure does not form part of any element of the 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. Recoupment of a loss or outgoing is defined in section 20-25(1) of the ITAA 1997 as: (a) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and (b) a grant in respect of the loss or outgoing. | Detailed Reasoning - Wells and wellsites, vent and drains and gathering system: As previously noted, in the current circumstances, based on the information provided, it cannot be said that the compensation received in respect of the wells and wellsites, vent and drains and gathering system is wholly attributable to the underlying asset (and the permanent damage to, or a permanent reduction in value of the Property) such that it would represent a recoupment of all or part of the total acquisition costs of the asset (the first cost base element). Subsection 110-25(5) of the ITAA 1997 defines the fourth element of the cost base as capital expenditure you incurred: (a) the purpose or the expected effect of which is to increase or preserve the asset's value; or (b) that relates to installing or moving the asset. It is likely that anticipated expenditure incurred by the Taxpayers to rehabilitate the land as a result of the Activities outlined in Agreement B would fall within the fourth element of cost base. Based on the information provided, it cannot be said that the compensation received in respect of the wells, wellsites, vents and drains and gathering system is wholly attributable to the anticipated expenditure required to rectify the permanent damage to the underlying asset. Therefore payment of compensation does not result in a direct recoupment of these anticipated costs that may form part of the fourth element of the cost base of the Property. As a result, this portion of compensation received under Agreement B will not reduce the cost base of the Property under subsection 110-45(3) of the ITAA 1997 or prevent anticipated expenditure (future rehabilitation expenditure) forming part of the cost base of the Property. | Detailed Reasoning - Agistment costs: Compensation received in respect of agistment costs relates directly to the loss of income as a result of the impact the mining operations have on farming operations and is not a reimbursement of expenditure which forms part of the cost base of the Property. It is therefore considered that this portion of the compensation received under Agreement B will not reduce the existing cost base of the Property or prevent anticipated expenditure forming part of the cost base of the Property under section 110-45 of the ITAA 1997. | Detailed Reasoning - Access Roads: As previously noted, this payment is considered to be either rental income or compensation for loss of income relating to the Taxpayers' business activities. It is not a reimbursement of expenditure which forms, or may form, part of the cost base of the Property. This payment will therefore not reduce the existing cost base of the Property or prevent anticipated expenditure forming part of the cost base of the Property under section 110-45 of the ITAA 1997. | Summary: Given the compensation received under Agreement B is not a recoupment under subsection 110-45(3) of the ITAA 1997, this question is not applicable.

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. | Relevant facts: Entity B will pay the Taxpayers compensation pursuant to Agreement A and Agreement B for the use of the land (the Property) for exploration, construction and operation of mining activities. | The Taxpayers currently use the land to carry on a business of Primary Production. | The land is a post-CGT asset acquired after 13 May 1997.