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
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
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.
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