Private ruling: Compensation - permanent reduction in value
Date of advice: 10 October 2017
Published: March 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the lump sum payment you will receive assessable income? | A1: No. The lump sum compensation payment you are to receive is not assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 and you will need to account for its receipt in your CGT calculation when the property is disposed of. The Commissioners view on the taxation treatment of compensation received is discussed in Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts. Paragraphs 6 of 9 of TR 95/35 explains that if an amount of compensation is received wholly in respect of the permanent reduction in value of a post-CGT asset, and there is no disposal of the asset at the time of receipt, the amount represents a recoupment of all or part of the total acquisition costs of the asset.

Relevant facts and circumstances: You own a post capital gains tax (CGT) rental property. The adjoining vacant land to your property is in the process of being developed. You have been advised that due to site constraints, a sewer line will need to be constructed through your property to enable the new development to be connected to the city’s sewer mains. It has been agreed that the developer will pay you a one-off lump sum payment to compensate you for the permanent reduction in your property’s land value.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5