Australia: Tax implications of compensation payments on grant of mining leases - traps for primary producers

Mining companies that are granted mining leases, exploration permits or petroleum licences must pay compensation to the owners or occupiers of the land.

It is important that land owners consider the tax consequences of any compensation payment at the beginning of negotiations.

This is a complicated area of tax law and failing to consider tax consequences or even considering them later on in negotiations can result in the land owner paying large amounts of tax on any payment.

On the other hand, proper consideration of the tax issues early in the negotiations can often minimise the tax consequences because the tax treatment will be affected by how the payment is described. For example, different consequences will arise where the payment is compensation for loss of income as opposed to a payment as a result of a reduction in the value of a capital asset.

If compensation relates to the loss of value or damage to the land, this will be a capital payment, which reduces the cost base of the land and no tax will need to be paid on the compensation payment. This is generally the best outcome for the landowner.

A compensation payment may also be capital where a lump sum payment is negotiated that relates to loss of value of the land and also loss of income from the landowner's business. In some cases it may be possible to eliminate or reduce the capital gain arising from such a payment by applying the capital gains small business concessions.

However, if the compensation is structured in a way where payments for loss of income can be identified, tax will be payable on these payments.

The best time to influence how the compensation is characterised is early in the negotiation process.

At Cooper Grace Ward, we have significant experience in providing tax advice and negotiating compensation agreements on behalf of our clients.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.