1 Will the sale of the property be subject to Capital gains tax?
No. Question 2 Is the Disturbance Costs payment you received from the public authority assessable income? Answer No. Question 3 If the answer to question 2 is no, does the Disturbance Costs payment you received from the public authority get included in the capital proceeds for the sale of the property capital gains tax purposes or will it be classed as a separate assessable capital gain? Answer The Disturbance Costs payment will be classed as a separate assessable capital gain. Question 4 Is the Commercial Incentive payment from the public authority assessable income? Answer No. Question 5 If the answer to question 4 is no, does the Commercial Incentive payment from the public authority get included in the capital proceeds for the sale of the property for capital gains tax purposes or will it be classed a separate assessable capital gain? Answer The Commercial Incentive payment will be classed as a separate assessable capital gain. Question 6 Are the payments received from the public authority in early 20YY for obtaining legal advice in relation to consent to enter the property, and for environmental access to the property assessable income? Answer No. Question 7
If the answer to question 6 is no, do the payments received from the public authority in early 20YY for obtaining legal advice in relation to consent to enter the property, and for environmental access to the property get included in the capital proceeds for the sale of the property for capital gains tax purposes or will they be classed as a separate assessable capital gain? Answer The payments received for obtaining legal advice in relation to consent to enter the property, and for environmental access to the property will be classed as a separate assessable capital gain. Question 8 Are the payments received from the public authority in mid-20YY for reimbursement for legal expenses you incurred for obtaining legal advice and for Geotechnical investigations assessable income? Answer No. Question 9 If the answer to question 8 is no, do the payments received from the public authority in mid-20YY for reimbursement for legal expenses you incurred for obtaining legal advice and for Geotechnical investigations get included in the capital proceeds for capital gains tax purposes for the sale of the property or will they be classed as a separate assessable capital gain? Answer
The payment received for reimbursement for legal expenses you incurred for obtaining legal advice will not be classed as forming part of the sale proceeds, nor will it be classed as a separate assessable capital gain. Instead, there will be a reduction of the CGT cost base (incidental costs) relating to the CGT asset (the property) equal to the amount received for this reimbursement. The payment for Geotechnical investigations will be classed as a separate assessable capital gain. Question 10 If any of the payments received are an assessable capital gain, are you eligible to claim the CGT 50% discount for any of these payments? Answer No. This ruling applies for the following periods : Year ended 30 June 20YY The scheme commenced on: 1 July 20YY
Prior to 20 September 1985 you purchased a property (the property) which was land in two lots. You have made no major improvements to the property since you purchased it. How the property was used From the time the property was purchased you camped there whilst you hand built a shed, which upon completion you occupied as your main residence up until a couple of years after you purchased the property, where you then vacated the property. During the time you occupied the property you developed a small primary production operation as a partnership, which ceased once you left the property. Following this, you purchased and bred a small number of animals, which you left at the property and your neighbour ran the operation. However, all the animals were sold during the 199X-9X financial year and the primary production operation ceased at that point. In the year 20YY and subsequent years, you agisted the property out to other farmers. You were no longer classed as primary producers from the year 20YY, however you did declare the agistment income in your income tax returns.
From 20YY you were no longer making a profit from agistment of the property, and you phoned the ATO advising that no future profit was likely, and you declared the property as a hobby farm. From 20YY you ceased submitting a partnership income tax return, and you used the property to occasionally spend holidays until the public authority approached you to potentially acquire the property in late 20YY. In late 20YY the shed you built on the property, just after it was first purchased, was in poor condition and decrepit. Therefore, the shed had no value by that time. Negotiations to sell the property In late 20YY discussions commenced with the public authority regarding the potential sale of the property to them. In early 20YY, you notified the public authority that you agreed to doing a land valuation. In early 20YY you entered formal negotiations with the public authority to sell the property. Prior to these formal negotiations, you received the following payments the public authority: Early 20YY - $X for obtaining legal advice in relation to consent to enter the property. Early 20YY - $X for environment access.
Mid 20YY - $X as a reimbursement for legal expenses you incurred for obtaining legal advice. Mid 20YY - $X for Geotechnical investigations. Mid 20YY - $X as a payment towards legal expenses (which is included as part of the next payment below - disturbance payment). Amounts received for legal advice relating to consent to enter the property ($X) You have supplied a tax invoice dated in early 20YY you issued to the public authority for $X for obtaining legal advice in relation to consent to enter your property for preliminary investigations and project engagement activities conducted on your property. You have supplied a bank statement which shows an amount of $X credited from the public authority. Amount received for environment access ($X) You have supplied a tax invoice dated in early 20YY you issued to the public authority for $X for preliminary investigations and project engagement activities conducted on your property. You have supplied a bank statement which shows an amount of $X credited from the public authority.
You have supplied a letter dated in early 20YY addressed to you from the public authority relating to the relevant project being conducted by the public authority (the project) and consent to enter and payment for preliminary technical investigations (environmental). This letter sets out the terms of payment, along with the $X payment for obtaining legal advice regarding allowing the public authority consent to access your property (set out above in the previous heading). Amounts received for legal advice relating to environment access ($X) You have supplied a tax invoice dated mid-20YY for $X as a reimbursement for obtaining legal advice in relation to consent to enter your property for preliminary investigations and project engagement activities conducted on your property. You have supplied a bank statement which shows an amount of $X credited from the public authority. Amount received for Geotechnical investigations ($X) You have supplied a tax invoice dated in early 20YY for $X for consent to allow the public authority to enter your property to conduct Geotechnical investigations. Amount received as a payment towards legal expenses ($X)
You have supplied a tax invoice dated mid-20YY for $X for the purpose of legal costs and valuation or other professional fees arising as if the sale of your property had occurred via a compulsory acquisition under the Acquisition of Land Act 1967 . This amount was also agreed to form part of a Disturbance Costs payment totalling $X mentioned below. Letter of offer from the public authority (relating to the Disturbance Costs payment and Commercial Incentive Payment) In early to mid 20YY you received a letter of offer from the public authority, which you have supplied to us. The letter of offer makes references to their previous communication with you about the project, and your property. The letter of offer includes a revised offer to purchase your property for $X, which provides that this amount takes into account the following (extracted from the letter of offer document): 1. Current market value of your Land: this is determined by an independent registered valuer with relevant experience and geographical knowledge of the locality. The valuer has undertaken this assessment in accordance with the principles for valuation in the Acquisition of Land Act 1967 (State) (ALA); 2.
Disturbance costs: which you may incur because of the acquisition of the Land. These costs include professional fees, amounts for transfer duty on the purchase of a replacement property, legal costs for the purchase of a replacement property, and other relocation costs. The public authority has included an allowance for these costs in recognition that you would be entitled to claim those costs under the ALA if your Land was acquired using the compulsory acquisition process; and 3. Commercial incentive: the public authority is committed to reaching a negotiated agreement with you. To demonstrate this, a Commercial Incentive has been included as part of the offer. This amount represents the benefits a negotiated agreement provides to the Project. The letter of offer also specified that in most circumstances the relevant agreement documents will be: 1. Real Estate Institute Contract of Sale for the purchase of your land based on the market value amount; and 2. A separate agreement for payment of Disturbance Costs and the Commercial Incentive amount.
The Commercial Incentive amount was a negotiated amount being one third of the value of the land, as you did not accept the first offer to purchase your property from the public authority. This Commercial Incentive amount was offered to all land holders as part of the Project. Deed for Disturbance Costs associated with the sale of the property (along with the Commercial Incentive payment) You have supplied a Deed for Disturbance Costs associated with the sale of the property (the Deed), between you and the public authority, dated in mid to late 20YY which was also signed by you and the authorised signatory of the public authority on the same day. In the Recitals section of the Deed, it stipulates the following: a) The public authority is responsible for the delivery of the Project. b) The public authority may require the property for the Project. c) The public authority is a local body for the purposes of the State Development and Public Works Organisation Act 1971 and the Coordinator-General has power to resume land for works to be undertaken by a local body. d) The Seller (you) is the registered owner of the Property.
e) The Seller has agreed to sell, and the public authority has agreed to purchase the Property under a Real Estate Institute contract of sale. f) ln consideration for the undertaking by the Seller under this Deed, the public authority has agreed to pay the Seller for Disturbance Costs associated with the sale of the Property as if the purchase were a compulsory acquisition by the Coordinator-General and the Seller was entitled to Disturbance Costs under the Acquisition of Land Act 1967 and a Commercial Incentive. The Commercial Incentive amount is defined in Item 4 of the Reference Schedule of the Deed as follows: Commercial lncentive Amount a) As consideration for the Seller agreeing to the negotiated acquisition process for the Property such that a constructing authority will not be required to exercise its compulsory acquisition powers to acquire the Property, the public authority will pay the Commercial lncentive Amount to the Seller.
b) The public authority will pay the Commercial lncentive Amount to the Seller contemporaneously with settlement of the Real Estate Institute contract of sale and in the same manner as the balance purchase price is paid under the sale Contract. c) For the avoidance of doubt, the parties acknowledge and agree that the Commercial lncentive Amount is not consideration for the sale of the Property. The Project means the undertaking of works to prepare for, construct, operate and maintain the Project specified in Item 6 of the Reference Schedule of the Deed. The Disturbance Costs amount is defined in Item 3 of the Reference Schedule of the Deed as follows: Disturbance Costs Amount a) The Seller makes the undertaking in clause 2 in consideration for the public authority paying the Disturbance Costs Amount to the Seller. b) The Seller also accepts the Disturbance Costs amount in full and final satisfaction of its Disturbance Costs associated with the sale of the Property.
c) The public authority will pay the Disturbance Costs to the Seller contemporaneously with settlement of the Real Estate Institute sale contract and in the same manner as the balance purchase price is paid under the sale Contract. d) The Seller acknowledges receipt of the Pre-Paid Disturbance Costs Amount prior to entering into this Deed and agrees that the Disturbance Costs Amount paid to the Seller at the settlement of the Real Estate Institute sale contract will be reduced by an amount equal to the Pre-Paid Disturbance Costs Amount. e) For the avoidance of doubt, the parties acknowledge and agree that the Disturbance Costs Amount is not consideration for the sale of the Property Real Estate Institute Contract of Sale You have supplied the Real Estate Institute contract of sale, which you and the authorised signatory of the public authority signed in mid-to-late 20YY (without the intervention of an agent). The contract of sale confirms the sale of your property to the public authority for $X including GST. In late 20YY the settlement of the property occurred.
Upon the settlement occurring in late 20YY, you received the agreed amounts for the sale of the property ($X), the Disturbance Costs ($X less the $X you previously received in mid-20YY as a payment towards legal expenses, which also formed part of the disturbance payment) and the Commercial Incentive payment ($X). In late 20YY, you incurred $X in legal expenses in relation to the sale of your property and the receipt of the abovementioned payments.
Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 6-10 Income Tax Assessment Act 1997 section 20-20 Income Tax Assessment Act 1997 section 20-25 Income Tax Assessment Act 1997 section 102-20 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 108-5 Income Tax Assessment Act 1997 section 110-25 Income Tax Assessment Act 1997 section 115-25
Question 1 A CGT asset is defined in subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as any kind of property or a legal or equitable right that is not property. A capital gain or capital loss may arise if a CGT event happens to a CGT asset. The most common CGT event is CGT event A1 under section 104-10, and this occurs when an entity disposes of their ownership interest in a CGT asset. Where a contract for the disposal is entered into, the time of the event is when the contract is entered into (subsection 104-10(3)). A capital gain or capital loss made from a disposal of a pre-CGT asset is disregarded under paragraph 104-10(5)(a) of the ITAA 1997. Broadly, a CGT asset is a pre-CGT asset if it was last acquired before 20 September 1985 and no income tax provision has operated to treat it as having stopped being a pre-CGT asset. In your case, you purchased the property prior to 20 September 1985, and you have made no major improvements to the property since you purchased it. In your case, no other income tax provision will operate to treat the property as having stopped being a pre-CGT asset.
Therefore, the property is a pre-CGT asset, and any capital gain or capital loss made on the sale of the Property will be disregarded in accordance with paragraph 104-10(5)(a) of the ITAA 1997. Questions 2,3,4,5,6,7,8 and 9 Ordinary income Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: • are earned, • are expected, • are relied upon, and • have an element of periodicity, recurrence or regularity. For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon
(1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433). On the other hand, if the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income. Your previously conducted business activities performed on the property ceased in 20YY, and the property has not been used to produce assessable income since that time. Therefore, all of the listed compensation payments received are not earned by you as they do not relate to services performed or from carrying on a business and are not considered to be ordinary income.
Although the compensation payments relate to your property, the payments are not akin to rent. Rather the compensation payments are received for other reasons, including allowing the public authority consent to enter your property for technical investigations, allowance for associated costs for legal advice, Disturbance Cost payment (including professional fees, amounts for transfer stamp duty on the purchase of a replacement property, and associated legal and relocation costs), Commercial Incentive payment, and reimbursement of legal expenses. Although these payments can be said to be expected, and perhaps relied upon, this expectation does not arise from any personal services you have performed, and not from a business activity. All the listed compensation payments are capital in nature. In addition, the reimbursement of legal expenses is not income when they do not relate to an income earning activity, which is relevant to your situation. Accordingly, none of the payments you received from the public authority are regarded as ordinary income and are therefore not assessable under subsection 6-5(2) of the ITAA 1997. Statutory income
Statutory income is not ordinary income but is included in assessable income by specific provisions of the income tax law (section 6-10 of the ITAA 1997). These specific provisions are listed in section 10-5 of the ITAA 1997 and include recoupments and capital gains, which are included in assessable income by virtue of the relevant provisions. Recoupment Under section 20-20 of the ITAA 1997, an amount received as recoupment of a loss or outgoing may be an assessable recoupment if it is paid to cover the cost of a deductible expense and the deduction can be claimed in the current year or in an earlier income year. Recoupment of a loss or outgoing includes any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery (subsection 20-25(1) of the ITAA 1997). The term recoupment is defined in section 20-25 of the ITAA 1997. Subsection 20-25(2) provides that where another entity pays an amount for you in respect of a loss or outgoing that you incur you are taken to receive the amount as a recoupment of the loss or outgoing. Therefore, the listed compensation payments may be regarded as an assessable recoupment.
The business activities performed on the property ceased in 20YY, and the property has not been used to produce assessable income since that time. There were no deductible expenses available which related to your property at the time the compensation payments were received. Therefore, none of the listed compensation payments received will be regarded as an assessable recoupment under subdivision 20-A of the ITAA 1997. Capital gains tax provisions Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens. For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset. The CGT event usually arises from a particular transaction or occurrence involving a CGT asset of the taxpayer, although certain CGT events may arise in circumstances which do not involve a CGT asset (e.g. capital receipts). Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. The land you held is a CGT asset.
Are any of the payments received considered to be part of the sale proceeds for the disposal of the property (a pre-CGT asset)? In early to mid 20YY you received a letter of offer from the public authority. The letter of offer included a revised offer to purchase your property for $X, which provides that this amount takes into account the market value of your property, the Disturbance Costs, and the Commercial Incentive payment. The letter of offer also specified that in most circumstances the relevant agreement documents will be: 1. Real Estate Institute Contract of Sale for the purchase of your land based on the market value amount; and 2. A separate agreement for payment of Disturbance Costs and the Commercial Incentive amount. You have also supplied a Deed for Disturbance Costs associated with the sale of the property (the Deed), between you and the public authority, dated mid-to-late 20YY which was also signed by you and the authorised signatory of the public authority on the same day.
Under separate clauses in the Deed, each relating to the disturbance payment and Commercial Incentive payment, it provides that the parties acknowledge and agree that both of these payments are not consideration for the sale of the property. In addition, regarding the other payments you received from the public authority, there is also no evidence in the supplied contract of sale that any of these additional payments formed part of the sale proceeds for the sale of your property. Therefore, none of the compensation payments received will form part of the sale proceeds for the disposal of the pre-CGT property. CGT event H2 Pursuant to section 104-155 of the ITAA 1997, CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset owned by an entity, and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base. Disturbance Costs
You have received an amount for expenses that you might incur because of the acquisition of the land (payment for Disturbance Costs). These costs include professional fees, amounts for transfer stamp duty on the purchase of a replacement property, legal costs for the purchase of a replacement property, and other relocation costs. The public authority has included an allowance for these costs in recognition that you would be entitled to claim those costs under the ALA if your Land was acquired using the compulsory acquisition process. The payment for Disturbance Costs also included an amount of $X for the purpose of legal costs and valuation or other professional fees arising as if the sale of your property had occurred via a compulsory acquisition under the Acquisition of Land Act 1967 . This amount was also agreed to form part of the Disturbance Costs payment totalling $X. The amount received for the Disturbance Costs is therefore an act or event that happened in relation to the property (a CGT asset you owned). Commercial incentive payment
As consideration for you agreeing to the negotiation acquisition process for the property to be sold to the public authority, you were offered a Commercial Incentive payment, which represented the benefits of a negotiated agreement to the project. The Commercial Incentive payment was offered to all land holders as part of the project and was a negotiated amount. The amount received for the Commercial Incentive payment is therefore an act or event that happened in relation to the property (a CGT asset you owned). Payments received to access the property You have received the following payments relating to granting the public authority access to your property throughout the negotiation process to sell your property to them: • $X in early 20YY for consent to enter your property for environmental access; • $X in mid 20YY for consent to enter your property to conduct Geotechnical investigations. Both amounts received are therefore an act or event that happened in relation to the property (a CGT asset you owned). Payment received to obtain legal advice relating to consent to enter the property
You have received the following payments from the public authority to allow you to obtain legal advice relating to consent to enter the property during the negotiation process to sell your property to them: • $X in early 20YY; and • $X in mid 20YY Both amounts received are therefore an act or event that happened in relation to the property (a CGT asset you owned). None of the abovementioned payments received resulted in any adjustment to the cost base of the land. In relation to the Disturbance Costs payment, there is no mention of purchasing a replacement property. In addition, the abovementioned payments received are in addition to the sale of the property, and do not form part of the cost base of the property. Therefore, none of the exceptions to CGT event H2 listed in subsection 104-155(5) of the ITAA 1997 apply in your case to any of the abovementioned payments. Therefore, for all the abovementioned payments received, CGT event H2 is brought forth upon receipt of each of the payments. Reimbursement of legal expenses However, regarding the amount of $X received in mid 20YY to reimburse the legal expenses you have incurred, this will not bring forth CGT event H2.
Instead, the amount you have received for this reimbursement will be taken to reduce any incidental costs incurred that attach to the CGT calculations for the property. Question 10 Under section 115-25 of the ITAA 1997, you are entitled to a 50% discount capital gain if the gain results from a CGT event happening to a CGT asset that you acquired at least 12 months before the CGT event. Under section 109-5 of the ITAA 1997, when an entity disposes of a CGT asset to you, you acquire the asset when the disposal contract is entered into or, if none, when the entity stops being the asset's owner. However, the note to subsection 115-25(3) of the ITAA 1997 provides: Capital gains from the CGT events mentioned in paragraphs (3)(a) to (f) (which includes CGT event H2) are not discount capital gains because the CGT asset involved in the CGT event comes into existence at the time of the event, so it is impossible to meet the requirement in this section that the asset have been acquired at least 12 months before the event.
Therefore, under subsection 115-25(3) of the ITAA 1997, any capital gains made for any of the compensation payments received (where CGT event H2 is brought forth) are not discount capital gains.